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Bonus Episode — Post-election reflections

Release date: 3 June 2022

In this episode of TaxVibe, Robyn chats with Julie Abdalla, FTI, Tax Counsel at The Tax Institute about what the recent Federal election outcome means for you and your clients. They discuss:

  • The state of the new Parliament
  • What we can expect for tax policy under the new Government
  • What The Tax Institute sees as the priority issues ahead of the updated Budget expected in October
  • Can the independents put tax reform on the agenda?

Host: Robyn Jacobson, CTA 

Guests: Julie Abdalla, FTI

 

Robyn Jacobson:
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'm joined by Julie Abdalla, who is the tax council at The Tax Institute. Julie is an experienced tax lawyer and emerging leader. She has practiced in the corporate tax teams of Big Four and top tier law firms in Sydney and Melbourne.

Robyn Jacobson:
Julie also gained experience across the spectrum of UK taxes while working at an international law firm in London. Julie has a strong passion for tax policy and reform, and the depth of knowledge to advocate for members. She's been recognized among her peers and throughout the profession for her leadership and excellence in tax. Julie holds a bachelor of arts and a Juris Doctor from the University of Sydney, and a master of laws from the University of Melbourne, part of which was completed at the University of Oxford. Julie, welcome once again, back to TaxVibe.

Julie Abdalla:
Thank you, Robyn. It's a pleasure to be back here on TaxVibe and in person too.

Robyn Jacobson:
Absolutely. So we are recording this episode live and in person at the Victorian Tax Forum. And to also let our listeners know that the conversation that Julie and I are going to have today is in part drawn from a session that we ran earlier today with our colleagues, Scott Treatt and Andrew Mills at the Victorian Tax Forum, and a recording of that session will be made available to all Tax Institute members.

Robyn Jacobson:
So Julie we're here today to talk about the election, it was last Saturday, and whilst the dust is still settling it's becoming very clear of certain ways the chambers are shaping up. So we're going to talk through what the House of Reps looks like and the Senate, and what this means for tax policy and for all the practitioners out there that are trying to advise clients when there is still some uncertainty in relation to some measures. So to make the point that The Tax Institute has always been apolitical and we will continue to be so, and it's important that we be able to work with any party that is in government and across all of the government agencies. But Julie, with the change in government, and we, of course, now know that Anthony Albanese has now been sworn in as the 31st prime minister of Australia. This does create new opportunities.

Julie Abdalla:
That's right, Robyn. There is an opportunity for us to develop new relationships with politicians and ministers that we haven't had relationships with before. What we have seen is that it's quite an interesting House of Reps and Senate, which we'll get into in a bit of detail shortly, but it's certainly more diverse than we've seen before, but it actually remains to be seen how things play out.

Robyn Jacobson:
And how effective it's going to be in terms of governing.

Julie Abdalla:
Absolutely.

Robyn Jacobson:
So it is yet to be determined whether the Labor Party will be able to form what's called a majority government or a minority government. So this, of course, focuses on the House of Reps, where there are 151 seats. So to have a majority government, you need to have a majority of the seats in the lower house, that would be 76 seats. Now we're following a combination of the ABCT outcome and also the Australian electoral commission.

Robyn Jacobson:
At the moment they're placing Labor on 75 seats, so we're still not sure whether they'll make it to 76, which would mean they would govern in their own right. If they remain at 75, they have certainly been assured of what is called supply and also confidence from cross benches. In other words, if a no confidence motion was put up, then the cross benches would vote against that but if they do stay put at 75 and don't get to 76, they would need the support of at least one green or one cross venture, or let me say it, one member of the liberal party or the Coalition, which is unlikely, in order to get their particular measure through. So it remains to see exactly where we land in terms of the lower house.

Robyn Jacobson:
Julie and I are also going to have a chat about the role of independence and smaller parties in terms of getting policy through and what that looks like. So let's take a slightly closer look at the lower house, as I said, Labor is sitting on 75, we know there's been a swing against, not just the Coalition, Julie, but also Labor itself. So in other words, both the major parties have had a swing against them in favor of the Greens and also the independence. So what does this mean?

Julie Abdalla:
So we've seen an increase from about six to 16 cross benches, which is interesting, I touched on there being a more diverse makeup, but it's going to be interesting to see how this actually plays out in practice in terms of developing policies and getting legislation put through, and even more so in the Senate, we will come to that shortly.

Robyn Jacobson:
So we've got increased diversity, Julie, but how workable, that is, what that looks like and how they're going to come together will be really interesting to watch, but what is more interesting is the look of the Senate. So can you talk us through where we are landing based on current count?

Julie Abdalla:
Yeah. So in the Senate, there's 76 seats and the key number is 39, so we need 39 to form a majority. Right now it's looking like the Coalition's got 31 seats, Labor has 26 and the Greens have 12. So there are still two in doubt yet to be confirmed, but if you think about Labor and the Greens, even together that only forms 38, and so they'll need at least one cross venture to get things through. The challenge here is, where you've got the Coalition 31 seats, so it's not a majority either, but there is a risk posed by the ability to block measures, and that actually creates influence in terms of the independence.

Robyn Jacobson:
We know the new treasurer is Jim Chalmers, and he's indicating that they will deliver a revised budget because of course we have the 22-23 federal budget delivered on the 29th of March by the Coalition, but with a changing government, it looks like we'll have an October budget, and that will be an opportunity to potentially reset but at least revisit policies that have been announced and hopefully get some certainty on where the new government stands on on each of those policies.

Robyn Jacobson:
Certainly in terms of the way Jim Chalmers is talking up the economic situation, don't be surprised if we see deficits that could even be larger than what have been forecast. It is often the case of either side of politics that an incoming government will say that the books are in a worse state than we thought and we also know that there may be a priority over certain spending measures to boost productivity and get the economy going again, and of course, to curb rising inflation, as opposed to the priority being to make sure that deficits are brought down, and they're going to be reasonably high in the short to medium term, at least.

Robyn Jacobson:
So moving onto, what can we expect for tax policy under a Labor government? Well, I'm going to start with personal income tax cuts and the lay of the land there. Labor has indicated that they have committed to delivering the already legislated stage three income tax cuts that are due to start on the 1st of July, 2024. And this will provide tax relief for more than 9 million Australians earning over $45,000 a year. Now, Julie, it remains to be seen whether in fact that already legislated series of tax cuts does proceed, or whether in fact, given dynamic environment and anything can change between now and then, whether in fact, we do see that come to fruition, so it will be interesting to watch.

Julie Abdalla:
That's right, it might not necessarily be the best policy to stick to what has been announced when things are changing so quickly. If the government's getting advice from treasury external economists, that this is going to exacerbate a problem, then it may actually be prudent to step away from it and consider other measures that might be more suitable in changing economic climate.

Robyn Jacobson:
Still on the personal tax front, Labor government has also committed to supporting the increase in the low and middle income tax offset. So in the budget, this was called the cost of living tax offset, but it's actually just an increase in the LMITO by $420 for 21-22. Now that is expected to conclude after the end of this financial year, you'll still be claiming it or of course the ATO will be processing it through 22 tax returns but it won't apply beyond June 30 this year. So I also wonder whether that's a policy that Labor would question or revisit its effective removal is going to result in a tax increase for millions of Australians who for four years now have become very accustomed to seeing that being built into their tax liability as a reduction thereof.

Robyn Jacobson:
Julie, on the main tax policies and platforms that were put forward by Labor. There really wasn't much that they spoke of, and maybe that's a result of the policies they put forward in 2019 that they didn't want to revisit necessarily in this election campaign. But there was certainly talk about their intention to target multinationals and whether there is any more revenue that if you like, or lemon juice that could be squeezed out of that lemon, what are your thoughts on this?

Julie Abdalla:
That's right. So we know that both major parties declined to put any sort of holistic or significant tax reform on the table, but multinationals did get quite a bit of attention from the incoming government and in a few different measures they've looked to target the way that multinationals could avoid their tax obligations. So one way the government is looking to target this is by supporting the adoption of the OECD/G20 Inclusive Framework on BEPS 2.0 proposals, including global minimum tax rate or 15%, and other ways, a proposed modification of the thin cap rules, to reduce a safe harbor, to a cap of 30% of EBITDA, which is earnings before interest tax depreciation and amortization, and that's really to limit debt related deductions by multinationals.

Julie Abdalla:
We would still be maintaining the arms length test and the worldwide gearing ratio, which allow a taxpayer to justify a higher interest deduction than the safe harbor. I won't get too much into the detail, as Robyn mentioned earlier, we did speak about these measures at length in the earlier session today, but this is really consistent with the OECDs recommendations from the 2015 BEBS action for limitation on interest reductions report, and it would be not inconsistent with what other countries have implemented, where they've taken on board these recommendations.

Julie Abdalla:
Another measure is about treaty shopping, and it's really trying to target royalty payments where they're made to a jurisdiction with a favorable tax system, but that only applies to quite a limited group of significant global entities. Finally, there were measures that were announced in relation to transparency, which relate to country by country reporting data being made public, a potential beneficial ownership registry, as well as exposure to tax havens and dealings with tax havens, and finally, in relation to government tenders.

Robyn Jacobson:
Julie, how does this align or otherwise with the Greens position, because they've also talked about targeting multinationals and certain multi-individuals. So how does that align?

Julie Abdalla:
That's right. So the Greens have looked to put forward policies, which target essentially rich companies and rich individuals. So there is a proposed billionaires tax, and also a 40% super profits tax on large corporations, which has actually got a lower threshold than the significant global entity concept.

Julie Abdalla:
Given the policies announced by the Greens in relation to multinationals and wealthy individuals, it'll be easier for Labor to garner some support from them in terms of its policies in relation to multinationals, but there is always the question of what the Greens will be getting in return in making those alliances.

Robyn Jacobson:
And this billionaires tax, Julie, where is it going to kick in or what's the rate that would be applied?

Julie Abdalla:
It's a rate of 6% and I think initially it was targeting about 110 billionaires, although it's looking now to be about 122 or so. It would be a tax of about 60 million per year, assuming each of them had a billion each, but obviously that's just the minimum, that's just the starting point.

Robyn Jacobson:
So if you are worth 10 billion dollars, it would be 600 million?

Julie Abdalla:
600 million dollars, that's right. Which seems astronomical, but I suppose relative to a billion, that's another story.

Robyn Jacobson:
All right, so another policy that the Labor party has been putting forward during the election campaign is what's called their electric car discount. Now, it's interesting when we look at climate policies, and of course there's been a huge push through particularly the independence about ensuring that there are better policies that target climate change and environmental impact. So this one is designed to encourage greater use of electric vehicles, and the way this would work is that the government would remove or exempt from the 5% import tariff and from FBT, electric vehicles that cost less than the fuel efficient luxury car tax threshold, and that's sitting just below $80,000 for this income year.

Robyn Jacobson:
So if you buy a 70 or $75,000 electric car, then under this policy there would be no FBT and no 5% import tariff. It's not just a case of eliminating the tariff and FBT on this, which immediately you would think would favor businesses and employers, but as an employee, anyone who can access exempt benefits through salary packaging is going to benefit as well. So it certainly would involve a rethink of what benefits could be packaged up and this would be another one you could add to that collection, where employees who would like to drive a fuel efficient car and be able to do so tax effectively through salary packaging may also benefit from this policy so we need to see a bit of detail around that one. While we're still on the idea of transport, Julie, the reduction in the fuel excise.

Julie Abdalla:
Well, that's only a temporary measure, that's due to come to an end on the 28th of September. So it will be interesting to see what happens then, but actually, if you think about it now, the price of petrol is creeping up quite quickly, and it's almost back to where it was even with the fuel excised reduction.

Robyn Jacobson:
I filled up on the weekend and it was $2.25 a liter. Goodness, if that had the additional 22.1 cents reduction not built in, it would be a $2,50.

Julie Abdalla:
It does come back to that bigger challenge of the cost of living on the impact of inflation as well.

Robyn Jacobson:
And if you look at the inflationary impact, we know the reserve bank is forecasting a peak in inflation, which of course recently hit the headlines at 5.1% for the 12 months to March, could well peak at 6%, by the end of the year. Now, the timing of this increase in the fuel excise when the temporary reduction ceases, would mean an automatic increase of 22 cents after the 28th of September. So firstly, you're going to have an inflationary impact, which we know has already contributed to the inflationary figures at 5.1%. So what would it do to take it even further towards six or beyond?

Robyn Jacobson:
And secondly, when you've got the price of fuel being advertised every few kilometers, driving around the suburbs, it's a very visible reminder of the cost of living, and when not just fuel for cars is going up, but transportation generally. So if you think about all the deliveries of goods and services, and how that impacts ultimately what hits our supermarket shelves and the prices there, it's going to be really interesting to watch this politically play out as well as from an inflationary perspective.

Robyn Jacobson:
So Julie let's return to a closer look at the independence who now make up what looks like to be 16 seats in a long house, we've never seen this many, previously six and now we're looking at 16. We know that the media has focused on primarily three aspects to their collective platforms. Most of the independence and many of them indeed are women, have been looking at policies that focus on climate change, greater equality for women and establishing a federal integrity commission, and certainly on that last one, it looks as though that may well be progressed in the next three to six months so this calendar year. But that was the media focus, if we actually peel back some layers and dig a bit deeper, what else have the independence been looking at and does any of it relate to what we would love to see on the agenda tax reform?

Julie Abdalla:
Yes, actually. So if you dig a bit deeper, you'll see that quite a few of the independents have a strong interest in RND, innovation and supporting small businesses. And indeed two of the new independence, Kate Chaney for Curtin and Allegra Spender for Wentworth, have both come out and made comments about the need for tax reform and to revisit our system.

Robyn Jacobson:
And indeed Allegra Spender has suggested a formal tax review to be concluded or reporting back by September of 2023. Now it's music to our ears, but perhaps too ambitious?

Julie Abdalla:
It could be challenging with everything else going on at the moment. It could be challenging to get that through in the timeframe she suggested, but it's really great to see them putting tax reform on the agenda and prioritizing that. And then if you think about the independence, you made a comment earlier that really the sum of their paths worth more. Together they can have such significant influence in the way government operates, they'll be making noise in public and bringing attention and drawing light to these issues, which is great.

Julie Abdalla:
And we talked about earlier the opportunity to build new relationships with different ministers and politicians, and certainly with the independence, that's what The Tax Institute will be looking to do.

Robyn Jacobson:
So regardless of the lower house, it's certainly looking like Labor would need all of the Greens and at least one independent to be able to get anything through. So there may be opportunities for an independent to say, "Well, yes, I'm happy to give you my vote on X, as long as you can provide Y." And that does create enormous opportunities. So yeah, that's why I say potentially the sum of the parts is greater than the whole, that individually there might be just one vote, but they may collectively be able to have a much greater voice in the parliament.

Robyn Jacobson:
Julie, what is The Tax Institute doing in terms of activities? And now that we effectively know the election outcome, what happens from here and what are our top priorities?

Julie Abdalla:
The team has been working hard on is preparing an incoming government brief, which will be provided to the new treasurer, Jim Chalmers. And that's drawn from our state of tax policy report, which many members will recall, we recently put out a federal budget, election special edition, and this incoming government brief will set out what we think are the priorities in terms of announce, but unenacted measures from a tax perspective, that we think should be at the forefront.

Robyn Jacobson:
So can you provide some examples of what we are considering are some of those key priorities?

Julie Abdalla:
Yeah. So one of the first that I would suggest is the corporate tax residency changes, we're a few years into it now, and we haven't seen draft legislation yet. So as many listeners would know, there was an announcement in the 2021, 2022 federal budget, which proposed technical amendments to the corporate residency test. And this follows on from the decision in, by water and the board of tax review. And essentially the law is proposed to be amended to provide that a company that's incorporated offshore will be treated as Australian tax resident if it has a significant economic connection to Australia. That of course will be where it's the company's central management and control is in Australia and its core commercial activities are also undertaken in Australia.

Robyn Jacobson:
So to be clear, Julie, we're only talking about companies that are not incorporated in Australia, because if they're incorporated here, they're automatically a tax resident?

Julie Abdalla:
That's right. So public consultation, as I said, hasn't occurred yet, but treasurer will need to consult on a workable definition of core commercial activities to give taxpayer certainty in this regard. One other measure that I would like to mention as a priority is the patent box regime. So the original measure related to medical and biotechnology innovations, although that bill has since lapsed, there was a subsequent announcement which expanded the patent box regime to agricultural businesses and low emissions technology innovations, although that has not yet been introduced. So we would like to see the original measure reintroduced and the expanded version introduced into legislation.

Robyn Jacobson:
So have to pick up the original measure plus the additional one and both effectively, still in limbo.

Julie Abdalla:
That's right, yeah.

Robyn Jacobson:
Now, another measure that has been of interest to a number of practitioners is what is known as NALI, this is non-arm's length income. So this is where you have a superannuation fund that has incurred a non-arms length expense, and that can effectively taint or change the tax character of income derived by the fund where it's taxed at the top rate, rather than the 15% concessional rate. Now, around April the former minister for superannuation, Senator Jane Hume advised that they would amend the law, they would consider looking at what was necessary to make the provision work as intended.

Robyn Jacobson:
Now, given that she's no longer the minister for superannuation. And of course, we're still waiting to see who is going to be sworn in as that relevant minister, but certainly The Tax Institute will continue to engage, and has been with both the now opposition and the now new government so that we can ensure that tax law works as they're supposed to. And this isn't just about self-managed funds with a small property that's not being treated concessionally, this can affect really big funds as well and unintentionally so. So we hope that we can get some resolution and some legislative clarity on that one very soon.

Robyn Jacobson:
Probably the biggest measure that is of interest to the small business sector at the moment is the small business boost. In fact, there are two of them, the small business skills and training boost and the small business investment in digital technology boost was announced in this year's budget. And this provides an additional or a bonus 20% deduction for eligible expenditure where the entity has an aggregated turnover of less than 50 million. Now, the skills and training boost started on budget night, 29th of March this year, and will end on the 30th of June, 2024, whereas the investment in digital technology boost, while also starting on budget night this year, will end on June 30, 2023, a year earlier.

Robyn Jacobson:
The problem is, Julie, that these two measures did not make their way into parliament before it was prorode back in March following the budget. So neither of these booths are law and we yet to understand exactly where Labor sits on both of these. I'd like to think that they would support them and that this will be a fairly swift passage of legislation but until parliament resumes, and we're unclear whether that will be at the end of June or perhaps not until the 9th of August, and whether or not in fact, we could be waiting until October in this so-called budget that's going to be handed down, to gain some certainty around this, but it makes it very difficult for advisors in the meantime.

Julie Abdalla:
That's right. The difficulty is with these kinds of measures they're designed to incentivize spending on these kind of categories. The difficulty with these kind of measures is that they're designed to incentivize spending, but the challenge is, where they're not legislated businesses don't have enough certainty, and this is the challenge for the businesses and their advisors. It's not law yet and so it's not clear whether it will be legislated, whether it will be legislated in the form that it was announced, we just don't know. So it's hard to encourage that spending to take place now.

Robyn Jacobson:
That said, Julie, remember that these measures while starting budget night, we're never going to permit the boost to be claimed in the 22 tax return. So whilst you may have eligible expenditure now, assuming this does become more, the first time you would actually claim this would be through the 23 and 24 tax returns. And to go a step further, I'm expecting to see that your basic expenditure, let's call it the base amount, so let's say spend a hundred dollars that would still be deductible in the year you've incurred or spent it, but the boost component would not be claimable until the 23 and or the 24 tax return, depending on which particular boost you're looking at. So I just want to assure our listeners that it's not as if this is going to impact on the preparation of 22 tax returns, because we're about to go into that compliance season.

Julie Abdalla:
No, that's right, and there might need to be some new labels on the tax returns to be able to distinguish between the different categories.

Robyn Jacobson:
The other elephant in the corner of the room, and I call it an elephant because I know there's been a lot of talk in recent months about Division 7A and Section 100A, and whether there would be any legislative reform or push for legislative change. So let me take each of these in turn. The Division 7A legislative reforms... Look, Julie, we've hit 10 years, it was 2012 when the then Labor government commissioned a review by the board of taxation, and it was 2016 when the Coalition government said that they would amend the law. We've not seen those changes beyond a discussion paper released back in 2018, nothing since. So we know we've got a draft position from the commissioner to do with unpaid present entitlements, but that doesn't address the other aspects that were proposed in the discussion paper to reform Division 7A more generally.

Robyn Jacobson:
So we've got to be careful what we wish for as a profession, and while many would still like to see legislative reform and there were some good measures proposed, there were others that greatly concerned the profession. There's no mention, as far as we're aware that this is a priority for the government, certainly there's been no mention of legislative change since the measures were last deferred at the end of 2020, to start on the first one, July following enable in legislation being enacted and goodness knows when that's going to be. On Section 100A, this is not the time or the place to get into a big discussion on all the draft guidance issued by the commissioner, and we've had other discussions on that separately and I refer you to a previous podcast where I spoke with Jonathan Ortner about these issues.

Robyn Jacobson:
But there's certainly been a push by the profession to remove the unlimited amendment period that applies when 100A assessments are raised, and I just think this is something that the government should think about. If you look to the late seventies, when the provision was introduced, it was amidst the bottom of the Harbor schemes and trust stripping schemes and arrangements, and maybe there was an argument for it being unlimited, particularly in those days where access to information is not what it is today. But if you consider the fraud innovation provisions that are unlimited versus Part 4A which is only a four year amendment period, is it still appropriate that 100A is an unlimited amendment period?

Robyn Jacobson:
So we know both the former assistant treasurer, Michael Sukkar and his counterpart at the time, the shadow assistant treasurer, Steven Jones, undertook that they would be prepared to look at the legislation if legislative change is warranted. That it would be interesting too, to see whether an administrative approach can be the most suitable pathway to handle this rather than amending the law. So all of this still to play out but it's a really interesting period in terms of guidance from the ATO, potential policy changes at a treasury and in parliamentary level, and in the meantime you've got all the practitioners who are just trying to carry on and advise their clients.

Robyn Jacobson:
So in terms of where we go to from here, The Tax Institute will continue to engage with the incoming Labor government and the independence and the minor parties in relation to tax policy and continue to push, as far as our commitment is concerned, to genuine and holistic tax reform, there was talk from one of the independence Kate Chaney, and this is the new member for Curtin in WA, about a tax system that is future fit. It's a great expression, and we often talk about whether the tax system is sustainable or able to encourage growth and productivity and investment in businesses, et cetera, but I think that all boils down to it being future fit and we need a system that can carry us through the decades ahead.

Julie Abdalla:
While major tax reform wasn't on the agenda this election, there is hope for the next election, and it's really something that we need to make a mom and dad issue. Tax effects everybody directly and indirectly and we have a role to play in educating government on its impacts and on the importance of tax reform.

Robyn Jacobson:
Julie, I think we've covered so much ground today, but there is so much more we could say about the election. Look, more to discuss in the future, and I'm sure you'll be invited back onto TaxVibe, after the budget, and we can have another chat and break down what all this looks like with a bit more information from the government.

Julie Abdalla:
I look forward to joining you again, thank you for having me.

Robyn Jacobson:
Thanks, Julie. Thank you for listening to this episode of TaxVibe. I've been chatting with Julie Abdalla, FTI tax council at The Tax Institution. 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 on social media, follow The Tax Institute on LinkedIn, Facebook, Instagram, and Twitter. You can join the conversation on our member only community forum at community.taxinstitute.com.au. Not a member of The Tax Institute? Join a collective voice of 15,000 practitioners at the heart of the profession and find out what the best tax professionals have in common. For more information, visit tax institute.com.au/membership, you can also contact us by emailing tax vibe@taxinstitute.com.au. We look forward to you joining us next time.

Episode 19 — Bitcoin, NFTs and crypto assets: tax treatment explained

Release date: 20 May 2022

In this episode of TaxVibe, Robyn chats with Tracey Dunn, Associate Director, Tax Services, RSM Australia, about the tax implications of acquiring, holding and disposing of digital and crypto assets, including Bitcoin and non-fungible tokens (NFTs). They cover:

  • The basics you should be across in the constantly evolving world of digital assets
  • Legal and tax frameworks surrounding these assets (or lack thereof)
  • The tax treatment of cryptocurrency

Host: Robyn Jacobson, CTA 
Guest: Tracey Dunn, ATI

 

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.

Robyn Jacobson:
I'm joined by Tracey Dunn. Tracey is an associate director in the tax services division of RSM in Perth, and has worked in public practice for over 20 years. Prior to commencing a career in public practice, Tracey worked in commerce in various roles, including banking, logistics management, and international trade. She has significant experience in advising on the application of fringe benefits tax, division 7A and trusts, and regularly presents on taxation topics.

Robyn Jacobson:
Tracey writes extensively on the interpretation of tax legislation for businesses and has been published in a number of publications, including the Australian Financial Review, ABC News, Accountants Daily, Public Accountant Magazine, and Thompson Reuters Weekly Tax Bulletin. Tracey has a bachelor of business accounting, a graduate certificate in commercial law, and a bachelor of laws. I recently saw Tracey in person at our WA Tax Forum in Perth, as she presented on the world of digital assets, Are you ready? Her practical explanations prompted me to invite her to be a guest on TaxVibe. So Tracey, a very well welcome to you.

Tracey Dunn:
Thank you so much for extending the invitation to talk with you on TaxVibe.

Robyn Jacobson:
Pleasure. Look, I've known you for some years now, but when I saw this topic being presented, and it's so topical at the moment, there'd be few accountants in the country that aren't seeing some form of crypto come across their desk. I thought it really is a good opportunity to unpack this and understand it and peel back the layers for people who don't understand cryptocurrency, digital assets, blockchain, and these extraordinary new things called NFTs. So from the original use of blockchain, which, of course, was what launched Bitcoin, and gave it the underlying framework, and we've had this massive avalanche of cryptocurrencies emerging all over the world. And we've now got these NFTs, non-fungible tokens. And I know you got to explain this to us in more detail.

Robyn Jacobson:
We know that these continue to flood the market at an exponential rate. They're incredibly volatile. And I also think back to the way you were describing these in your session, the incomprehensible meets the incomprehensible, being tax law and crypto. And I think that's a great way to describe these two. So I thought we could kick off just by unpacking some of the key terminology that you and I are going to be referring to, because if we get too far into this by using terminology that isn't understood, we're going to lose them straight away. So what is blockchain? What is Bitcoin? What is cryptocurrency? And what are NFTs?

Tracey Dunn:
Okay. So Robyn, I think your analogy about peeling back the layers, blockchain and cryptocurrency in digital assets, you need to approach like an onion and actually peel back each of the layers to work out what it is. So, one of the things that I talked about in my session that you were at was the language. So the distinct language that is used around digital assets, that is quite confusing. It's unique. It's a lot of jargon. So we have blockchain, we have Bitcoin, we have cryptocurrency, and then we have O-coins, and we have stablecoins and we have staking and mining and gas fees and people get overwhelmed and go, well, I'll just switch off. But realistically, if we break things down, we can identify, or we can relate to these digital asset concepts to the everyday concepts that we see with clients who have shares or general banking transactions.

Tracey Dunn:
So blockchain, to try and simplify blockchain, it's distributed ledger technology, which in itself sounds confusing, basically means that the information is stored on multiple computers called nodes, which exist in multiple jurisdictions. And the information exists at the same point in time on every single one of those computers that happens to be on the network. And that's the beauty of blockchain, is that when a transaction occurs on blockchain, the information is gathered together by the nodes and they compete to solve these mathematical equations. So think of it as a game, or a competition to see who wins first, because there is a monetary reward for them if they solve the puzzle first. And when it's solved, that solved puzzle is broadcast to the entire network. So it exists everywhere, which creates jurisdictional issues for those that are using blockchain technology. But we'll set that aside. So basically peer to peer network. So I can transact with you, although I might not know that I'm transacting with you. And the information that relates to our transaction could exist in multiple nodes around the network. But once that information exists, it can't be changed.

Robyn Jacobson:
So in a very crude form, if I could use the analogy of a word document that we have up on, say Office 365, and you and I both have it open, and I make a change to it and it's permanently in markup. So you see my change and I can't undo my change, but we both agree the change is made and the change can only be made if you and I both agree to it?

Tracey Dunn:
Essentially. And if we were entered into a dispute down the track, or somebody wanted to dispute what happened in that very first version, we've got this single source of truth. That information can't be changed. So we could go back to that original transaction and whatever existed at that time will still be there.

Robyn Jacobson:
So whilst this technology underpinned the introduction of the ability for Bitcoin to evolve and all the other cryptocurrencies, it has enormous commercial potential for, I'm thinking of property and insurance and health records and passenger movements and all the dealings we have right across industry.

Tracey Dunn:
Absolutely. And personally, I see where that is where the future is. There's lots of interesting things happening now, but in the future that even using government. So with protecting tax file numbers and unique information that relates to a person's identity, if it's stored in blockchain and can't be changed, then it reduces the risk of identity fraud. So there's some real exciting things that could happen in that space, or that the technology can be used for, as it continues to develop.

Robyn Jacobson:
When you think about people who put forward academic qualifications, or university qualifications, to say that they have a doctorate, or they have a particular interest, or skill in some place, and you've always had to go back and verify that with the issuer of that qualification, with that institution, with blockchain, you would just know that to be true.

Tracey Dunn:
Yeah, absolutely. And that's what is really exciting about it. And you think from a perspective of, you mentioned property. So property records, we went through a period of time where there was fraud where people were claiming to be the owner of property. The actual owner might be overseas. Somebody was able to come in and pretend to be the owner, sell the property. The original owner actually comes back and finds that their property's been sold and there's nothing that they can do about it. So if you have records that are recorded on blockchain, then it makes it far more difficult for people to engage in that kind of fraudulent activity, which I think is really exciting.

Robyn Jacobson:
And I want to, of course, get us back to our core topic today, being crypto and NFTs. But from the perspective of the accounting profession, I think it really raises interesting questions about the future of the auditors, because I can see them in the future transitioning to becoming experts in all of this, where they're no longer verifying records, because the records are known to be true, but they become experts in helping to administer these sorts of systems.

Tracey Dunn:
Definitely. I think that this is a game changer for the industry. And one of the really important things, if we go back to the fundamentals is that we are now in a situation where at least one in four Australians, they either have crypto, or they have had crypto, and those numbers are going to continue to increase. So for agents, that means one in four of your clients will have a crypto transaction. So unless you build your skills and you understand the technology and the tax issues that impact on the use of that technology, you could find that you can't actually service your client base.

Robyn Jacobson:
So let's move into what is Bitcoin and cryptocurrency, and how is it different from blockchain?

Tracey Dunn:
So blockchain is that technology that underpins cryptocurrency. So blockchain was the technology that the original developers introduced to be the foundation for Bitcoin. In 2014, we had Ethereum come into the market. And Ethereum was really exciting because not only was Ethereum an alternative form of cryptocurrency, it was a platform that also allowed advanced applications to run on top of the Ethereum platform. So this is where the exciting things for more exciting developments come in, where we've got NFTs, non-fungible tokens, we've got decentralized autonomous organizations, we've got smart contracts, we've got all of these other exciting things and these amazing minds out there in the world that are creating things that faster than we can keep up with.

Robyn Jacobson:
Two questions come to mind immediately on this, Tracey, the first is, can you explain why they're so volatile? And secondly, how can anyone trust what's real? It's all virtual and intangible anyway, but how do we know what's real and what's a scam?

Tracey Dunn:
Well, that's a really good question, Robyn, and I'm not sure that I can answer it, because it's not regulated. There's no regulation in Australia, and there's no consistent regulations throughout the world. We have jurisdictions globally that they realize the potential of blockchain and the risks that are involved, and all of these different jurisdictions are working towards bringing in their own rules and regulations around cryptocurrency, because one of those real risks is scams, and the market is extremely volatile. So I'm sure we'll discuss this later, but cryptocurrency currently isn't recognized as a currency. So it's not something that generally people will transact with. But if I was to transact with you in cryptocurrency, there's still value there, because if you wanted the cryptocurrency that I had, it's value is in what you are prepared to pay for it. So it's an unregulated market. The value is in what another person wants to exchange at the time. And it's very volatile.

Robyn Jacobson:
And if we think about property, if I'm going to engage an agent to sell my property for me to you, the buyer, the agent has to be registered and hold a real estate license. If I'm going to engage a broker, or a financial advisor to assist me to move in or out of the share market, that person needs to hold an Australian financial services license, but in the world of crypto, none of that exists.

Tracey Dunn:
No, there are some rules. So if you are going to issue cryptocurrency in Australia, then you are required to have an AFSL. If you operate a digital exchange in Australia and you are going to advise or transact or offer a platform to exchange cryptocurrency and digital assets in Australia, then you may be required to have an AFSL, but it's unregulated. And there is nothing preventing you from transacting on a platform that exists in another jurisdiction. So you just google cryptocurrency, or download an app onto your phone, and nobody is required to give you advice. So there's very few barriers to people actually buying, selling, exchanging in cryptocurrency. And there's a real lack of information for consumers and investors.

Robyn Jacobson:
This volatility, we've all seen the prices skyrocket and then plummet almost to the same extent, and then they skyrocket again. We've heard of people that have made extraordinary wealth out of particularly low entry points. So they happened to enter when the market was right down, or they'd held it since the very early days and their wealth has just blossomed out of this. So we are starting to hear stories now of people that are experiencing those extreme highs and lows, much more volatile than the Australian share market. And I also think of the stories we've heard about people that have lost their digital passwords. And there was a report out of the UK where a fellow had lost his digital password. It was on the hard disc of a computer, which he threw out. It was years old. And he had long forgotten that the password was sitting on that computer.

Robyn Jacobson:
It ended up in landfill, his local tip. And for quite some time, I think he was ultimately unsuccessful, was trying to get court orders to order the tip to allow him to basically dig this entire physical area up so that he could try and retrieve this computer. Because of course, in the meantime, his wealth had astronomically blossomed. So we are going to continue to hear stories like this.

Tracey Dunn:
Absolutely. And that is a real risk. I think that there's a lot of people that aren't aware of that. So you keep your cryptocurrency, you can keep it on a hard wallet or a soft wallet. So your soft wallet might be an app on your phone. A hard wallet might look like a credit card, or there's lots of different providers. I have one that looks like a USB. And if I put that in my bag, I would probably never find it again. And when you use a wallet, this is one of the really interesting things, is that not only do you have your password or your pin to get into your wallet, and if you put your cryptocurrency on your wallet, that's where it's stored.

Tracey Dunn:
And if you set up an account on a wallet, it will give you multiple warnings saying, you must ensure you retain your password and your seed phrase in a secure spot where you know where to find it, because if you lose it and you don't have access to either your password or your seed phrase, you will lose everything that's on your wallet. It will not be able to be recovered. And a seed phrase, so you have your initial password and then you have your seed phrase, which is your backup. So if you forget your password, you can use your seed phrase. Well, a seed phrase is, I have one that's 12 words in sequence. So it gives you 12 words in sequence that you have to write down. And then it shows you on the screen, you have to verify in order each of those words, and you have to keep that little piece of paper somewhere safe.

Robyn Jacobson:
So this isn't okay. So popping down to your local bank branch, if you happen to forget your account number and saying, can I have access to my funds, please?

Tracey Dunn:
No. So if you lose it, or the dog eats it, or your house burns down, it's gone.

Robyn Jacobson:
So you want to have secure storage and backups in multiple places, but obviously very secure.

Tracey Dunn:
Absolutely.

Robyn Jacobson:
So let's move now to the legal and the regulatory framework around this. You've explained, at least within the Australian exchanges, you need to have an Australian financial services license to advise on these types of assets, or to run the exchanges themselves, but that doesn't extend to overseas exchanges. And that wouldn't apply if you and I are dealing privately with each other outside someone who is providing advice to us. So in terms of the protection for consumers, there's an old adage, it looks too good to be true. Is this one of those cases?

Tracey Dunn:
Pretty much. In very simple terms, yes. There's a huge amount of risk involved. So if people are not getting advice, there are limited protections unless the Australian consumer law applies as this being, say misleading a deceptive conduct, but for your average consumer, how are they going to be able to... There'll be challenges in actually bringing an action under the Australian consumer law, especially if they can't even identify who they're transacting with.

Robyn Jacobson:
We'll get onto the ATO properly in a moment, but we've also had many stories and reports about ATO concerns around self-manage superannuation funds, holding crypto or holding too high proportion of their assets in crypto. What are your thoughts around that?

Tracey Dunn:
I think that would be a question that I would throw for a financial advisor as to who was advising the self-managed super fund trustee. Now, I believe I don't work with self-managed super funds, but I believe that there are now caps on the percentage of assets, a self-managed super fund can hold in cryptocurrency, which is, for me personally, just from my own personal perspective, I think that having caps is a good thing because this is somebody's retirement and the crypto markets are so volatile. Now I play around with crypto, just for my own personal fun and knowledge. I have some crypto, not much, it's dropped 10% in the last two days. So, when you're talking about your retirement, to have that kind of volatility, and some of the crypto I've seen drop 40% in the space of two weeks.

Robyn Jacobson:
And yet if the share market did that, and it has done that at times through the GFC and the pandemic and so on, that would be front page headlines.

Tracey Dunn:
Absolutely.

Robyn Jacobson:
Okay. We're also seeing quite an increased use commercially. So when it first came on the market, there were people who were mining it. So these are the people who were solving the mathematical puzzles and basically creating these solutions, which became the Bitcoin. And then we had people who were trading in it and buying it and selling it, or people who were holding it for investment. But we're now seeing, you can buy things with it. You can pay for professional services, you can buy property, and we certainly, you can buy cars with it because we've seen that in one of the particular car manufacturers. So increasingly this is starting to become much more commonplace.

Tracey Dunn:
Absolutely, it is quite mainstream now. And I expect that it will continue to. There's a lot of businesses and organizations that realize that people have cryptocurrency and want to be able to transact in cryptocurrency. So they're providing that as a option.

Robyn Jacobson:
What the market wants, the market responds to.

Tracey Dunn:
Yeah. And there's no regulations preventing them from doing so.

Robyn Jacobson:
So let's talk about the ATO. They've put out some guidance, and that's been in the form of some taxation determinations, as well as informal web guidance. And back in 2014, they did issue four determinations, basically setting out their views on what they thought of Bitcoin and similar cryptocurrencies and digital assets. In terms of where the ATO sits on this, and also whether or not we can treat this as currency, is we know that many people would like to think of it as a form of currency, but what is it from a taxation perspective? Is it money or is it more akin to shares like a CGT asset?

Tracey Dunn:
So the ATO take the view that it is a CGT asset. And I would agree with that view. Essentially cryptocurrency is property. And whilst there hasn't been any judicial guidance in Australia on that question, there has been now I believe around four cases in international jurisdictions, the UK, Singapore, the New Zealand that have all landed at the same spot that cryptocurrency is property. So therefore if it's property, CGT asset not a currency. And if you look at an AAT case in 2020, Seribu Pty Ltd and the commissioner of taxation, that case dealt with the question of whether or not cryptocurrency was foreign currency. And the AAT, and whilst it's only an administrative appeals tribunal decision, held that it was not foreign currency. It was a CTT asset.

Robyn Jacobson:
In the ATO's original reasoning, one of the things they set out was it couldn't be a form of currency because there are only two forms of currency. We've either got Australian local currency, or we have foreign currency. And it can't be Australian currency because our official currency is the Australian dollar. And for it to be a foreign currency, it would need to be recognized as the country's currency, or a form of currency by a sovereign state. And back in 2014, there was no country in the world that was recognizing Bitcoin, or any other cryptocurrency as a form of currency for that sovereign state. Now in September, of 2021, El Salvador became the first country in the world, and I'm not sure that there are too many others that have joined them since, to recognize Bitcoin as a currency. And just looking at some media reports on this, they've spent hundreds of millions of dollars rolling out Bitcoin ATMs.

Robyn Jacobson:
You think of walking down the street and arranging money to be transferred through an ATM on the wall. They've bought Bitcoin at a government level on the basis that it's going to increase. And they're looking at rolling this out across their community and amongst their traders who have to get on board. And it is something that the ATO I imagine will need to consider as part of this, that as countries do start to recognize it, does that change the ATO's position, which is currently that it is not foreign currency, and it's certainly not Australian currency. Now, I don't know that the ATO position's going to change in a hurry and that's, of course, for them to set out any views on that, but it raises very interesting questions if more and more countries do get on board.

Tracey Dunn:
It certainly does. And I did hear quite a bit of chatter around that issue when El Salvador did make the decision to have Bitcoin as a currency, but there hasn't really been any discussion that I've seen that's substantive since then. And there's been nothing from the ATO. And when I look at what's happening on an international basis, the larger countries are still looking at cryptocurrency as a form of property. They're not recognizing it as a form of currency. I suspect that we won't have any clear position on that until either the ATO provides formal guidance, or somebody challenges it in a court.

Robyn Jacobson:
And it's not as though we've got dozens of OCD countries jumping on board, saying we are doing the same as El Salvador. They seem to be taking a quite cautionary approach as well.

Tracey Dunn:
Absolutely. I have not seen any other country that has made a declaration that cryptocurrency is foreign currency under their legislation.

Robyn Jacobson:
So let's now turn to the tax treatment. If I go out and I buy some Bitcoin today and I hold it for a period of time, it goes up in value. And then I sell it because I either want to exchange it for another form of cryptocurrency, or because I want to cash it out and buy something with it. What's my tax position?

Tracey Dunn:
Well, generally, and this is one of these circumstances that we need to peel back the layers. We need to have a look at how did you acquire that cryptocurrency and what was your intent? So if your intent was to hold the currency, to exchange it in the future for something of value and, or to hold it with the intent that it would increase in value, so you could eventually exchange it, then it's more than likely of, I'll just say it is a CGT asset. And the implications for you is that you will have a accessible capital gain on the disposal.

Tracey Dunn:
So it will be like any other CGT asset. And you'll have a look at, do I have a CGT asset? Yes, it's been disposed of, is the disposal value less than the cost base? Yes. I've made an accessible capital gain. Do I have any capital losses that I can offset? How long have I held it for? Have I held that CGT asset for longer than 12 months? Because if it's a CGT asset, if you've held it for longer than 12 months, and it's on an investment account, capital account, then you're going to be eligible for your 50% CGT discount.

Robyn Jacobson:
The personal use asset is an interesting one because I've often heard people say, oh, yes, I can disregard the capital gain, or the capital losses, the case may be, depending which way you've gone, because it's a personal use asset, and I only bought it for a very small amount, but we've got to remember that the personal use asset rule is where you are holding onto the asset for your personal use and enjoyment. So it's one thing if you bought the crypto with the intent that you are going to hang onto it and the gain that you've made, you are going to go out and buy a holiday with it, or pay for your wedding, or do something, I don't think your wedding's probably more expensive for a crypto, but you know what I mean?

Robyn Jacobson:
But if instead it was a case of buying an asset, waiting for it to go up in value, cashing it out and then spending it on your personal use item, why is it any different to buying some shares that have gone up in value and then using the profit from the shares to pay for the holiday, or the wedding, or the private expenditure that you wanted? So, I think consider there are often misunderstandings about exactly how broad or narrow this personal use asset exemption can be.

Tracey Dunn:
Absolutely. I think there's this misunderstanding that people look at cryptocurrency and think of it, that it is the same as their bank account, if they can buy and sell things, which is actually quite limited in Australia at the moment, then it looks and smells like a bank account. So maybe it is a bank account, but in reality, it's not. It's no different than buying shares. If you are buying the cryptocurrency because you can see how volatile the market is, and you're hoping that you're going to have a 2000% increase on what your purchase price was. Then your intention is no different than buying a share or another investment asset. You buy it with the speculative intention that you're going to make money. And once you've converted it to fiat currency, then you've got your personal use asset because it's just your cash in a bank that you then go and spend on personal use items.

Tracey Dunn:
That said, there may still be occasions where cryptocurrency is a personal use asset, very limited. But if I think of an example that if say a cryptocurrency is minted and it's specifically for use in an online gain. So for you to be able to get into, and use that platform, but you can't then convert it back to fiat currency or any other form of currency, and it's used to play a game. Then that might be a personal use asset, because the reason that you purchase that particular coin is for your personal use and enjoyment, and you can't exchange it for something else of value.

Robyn Jacobson:
You've been referring to this concept called fiat currency. Some people may not be familiar with what that means.

Tracey Dunn:
Australian dollars.

Robyn Jacobson:
So our local currency.

Tracey Dunn:
Our local currency. Yes, apologies.

Robyn Jacobson:
No, that's okay. Now there'll also be some people who are what we call miners or traders, and it's still a CGT asset because, of course, trading stock is a CGT asset, but we have a different set of tax rules that may apply to them.

Tracey Dunn:
Yes we do. And that takes us into a whole new area. So you touched before on miners, and miners are different to traders. So if I start with traders, because we started with a CTG asset and we've got the different concepts between capital and revenue. So if you had shares, you might hold them on capital account, you might hold them on revenue account. If they're on revenue account and you are trading, you are looking at the volume of your transactions. So same thing with cryptocurrency, you would need to go through that. And [inaudible 00:29:01] of, are you carrying on a business to see whether you are trading?

Tracey Dunn:
Mining is different. So mining is a reward for a service. So not necessarily trading stock, but might be once you have received the reward, again, you have to look at what the underlying transaction is. You could have a miner that's just a person that just happens to have a really sophisticated computer that happens to be lucky enough to solve the mathematical equation, or you could have a mining pool where a number of large organizations that have a massive amount of computational power use their power, they pull it to get the rewards of solving these mathematical problems, because when they solve the problems, they get a reward of cryptocurrency. So that initial reward is a reward for service and it's revenue, but then they've got their underlying asset that is either going to be a CGT asset, or it's going to be held on capital account, or it's going to be trading stock depending on how they use it.

Robyn Jacobson:
I don't think we can get our heads around the computational power that's required. I remember the early days there was talk that all the low hanging fruit was essentially being taken. So the easy solutions it's like getting the first 50% in an exam, it's always easier than the second 50%. And so a home computer in the very early days was capable of being able to generate Bitcoin to mine it and find those mathematical solutions to the puzzles. But it's got to the point now where the power needed, there was talk about it consuming more electricity than the whole of New Zealand consumes an entire year. It's extraordinary.

Tracey Dunn:
Yes it is. And that's absolutely correct, is the amount of power that is required to mine Bitcoin in 12 months is more than many small countries consume in a whole year. So it's not very environmentally friendly.

Robyn Jacobson:
I have to say, this will not be of great attraction to people that are very mindful of the environmental impact.

Tracey Dunn:
Well, this is where the proof of stake, which is a new method of authentication, which uses holdings of coins is coming into play. So it's a different verification method that is more environmentally friendly, and we are starting to see, and it was one of the topics in the Senate inquiry into Australia as a innovation hub, was potentially providing a tax incentive to miners, to develop more environmentally friendly methods of verifying cryptocurrency transactions.

Robyn Jacobson:
I want to discuss with you the way the ATO approaches this, because perhaps for a long time, there was a perception that the ATO couldn't possibly see this, it's off their radar, how do they know what I'm up to? I can make profits. And as long as I'm not getting back into Australian dollars, how would the ATO know? I attended a conference many years ago where someone from the ATO was speaking about this, and it was the early days of Bitcoin being rolled out. And the way they described it was, imagine you have a highway and on every major, or even a freeway, probably a better analogy, but on your freeway or your highway, you have entrances and exit points. So there's the entry ramp and the exit ramp. And back then the ATO was saying that they couldn't always have visibility over who was on the highway itself, that they could see when people were jumping on or jumping off it.

Robyn Jacobson:
So for example, if I take money out of my Australian bank account, and we're talking about Aussie dollars, and I go and buy a cryptocurrency with it, they will see the withdrawal from the bank account. They may not know what I do with the crypto once I'm in crypto world, particularly where I'm in foreign exchanges now, as opposed to the Australian ones, but they may well see what I'm doing if I then cash it out and go and buy property with it, or buy a car with it in Australia. So again, I'm interested in your thoughts about how's the ATO going with all this? And it's not that you're, of course, representing the ATO, but they're getting better at identifying when people are engaged in these transactions. And anyone who thinks that, oh, don't worry, the ATO won't see it. I think they need to think twice about this.

Tracey Dunn:
I agree completely. That ATO have extremely sophisticated data matching and data accumulation programs. So anyone who thinks that they're going to fly under the radar with cryptocurrency transactions, good luck to you. Well, you've probably going to need more than good luck. So in Australia, we have laws now that give the ATO powers with their data matching. So I'll take a step back with that, or say that with digital service providers and digital currency exchanges, now if they have a presence in Australia, so they operate a business in Australia, or they have a permanent establishment here, they're required to register with ASIC as a digital service provider.

Tracey Dunn:
The ATO's data matching program requires digital service providers to provide information to the ATO in relation to cryptocurrency and digital asset transactions. There's a lot of digital service providers in Australia, and that might not just be limited to a digital currency exchange, but also accounting platforms that are tracking information between banks and reporting accounting information, or there's bank transactions as you mentioned about the highway analogy. So it still allows the ATO if you have a taxpayer who is dealing with a digital currency exchange in an offshore jurisdiction, that the ATO still has visibility of where the money is transferred from Australian bank account to this offshore digital currency exchange. I see on many pre-filled reports, quite a lot of them these days, says the ATO has information that you have had a cryptocurrency transaction this year.

Robyn Jacobson:
And I think it's important to call out that where you have someone who swaps one form of cryptocurrency for another, this is no different to say selling the HP shares and buying Telstra shares. You may still be in the crypto environment, but you have exchanged one CGT asset for another. So at a tax level, you've had a CGT event, it creates a taxing point.

Tracey Dunn:
Yes it does. And because of the volatility of the crypto markets, you might find that people have multiple transactions, and you might have people who are not only doing these exchanges between one form of cryptocurrency and another, but they might also be staking their currency and getting staking or rewards, which is like interest. They might be using decentralized finance platforms and investing, or purchasing these financial products in cryptocurrency. And they can have multiple CTG events that are going on, because it's on a platform they may not actually be aware that they may have multiple transactions that are going on. And that then leads us to an issue with record keeping and working out what is the actual tax position? What is the net capital gain or loss?

Robyn Jacobson:
Final discussion, because there's so much for everyone to think about as they're getting into tax time again for 2022, not far away now. NFTs, that's just a whole new layer, whole new set of rules. So what's going on with these?

Tracey Dunn:
Okay. So a non-fungible token, NFT, it's non-fungible. So it's not like crypto, but it's an asset that you own. So it does relate to you and it can relate to digital art, music, it can relate to an actual physical, underlying asset. It might represent membership to an online community, and it might have then further rights that are attached because of your membership to that online community. So in a very basic form, now I've mentored my own NFTs. It wasn't hard. I used a platform and I connected a wallet, and that might sound like strange language, but it was actually really easy. And I uploaded a photo and then I pressed a button that said mint NFT. And there it was, it was created.

Tracey Dunn:
So my image, that was actually a drawing that I did in 1987, is out there on blockchain. And if I want to sell it, then I can set up in that account a base price, so a floor price for my NFT, and I can attach conditions. So I can say, well, if somebody buys it and then continues to trade in that NFT me as the original artist receives a 2.5% commission on every trade.

Robyn Jacobson:
Are you trading the right to the drawing you made, or the right to be able to access the drawing that you made?

Tracey Dunn:
Well, it depends. It depends on what rights that you attach to that NFT.

Robyn Jacobson:
So you can create whatever rights you want?

Tracey Dunn:
Absolutely.

Robyn Jacobson:
Now the tax treatment of these, because they [inaudible 00:38:27] grow in popularity, again, we seem to have volatility. We seem to have an attraction to NFTs because someone famous has one, or is a member of one of these exclusive communities, and that can push the price up.

Tracey Dunn:
Yes. And this is one of the exciting things that I've spoken with you about before, and it's these multiple layers that can attach to an NFT. And to work out the tax treatment, you actually have to strip back those layers and look at what is the original underlying NFT? So what were the rights that were attached to that? And I'll use the example that I used in my presentation. It was an NFT that on the purchase, you had exclusive rights to the digital artwork that was represented by that NFT. So once it was yours, it was yours to deal with as you please. And with that, it gave you an exclusive right to a rather exclusive club. And that's really where the value came. So if you traded that NFT with another person for value, then you've got a potential disposal of a CGT asset.

Tracey Dunn:
But if you held onto that asset, there was additional rights that came with that. And it might be that you were entitled to an airdrop of this new currency that was minted, that was exclusive to your club. It might give you rights to exclusive club membership that has other rights. So it might be something that is of an income nature. It might give you the rights to obtain another CTG asset for no cost. So you've then got to have a look at what is the underlying asset and what are the assets, or revenue items that I've received, because I own that original non-fungible token. And that to me is really, really interesting, because you have multiple layers that you have to peel away and then try and identify it, match it up to something that is in the old tax world that might be a right to income, the right to a share issue and things like that.

Robyn Jacobson:
Can we turn now as a final discussion, inheriting these sorts of assets. So someone passes away, they've got wealth in these, let's assume that we do have the passwords or the details of the digital wallets and so on. So it's not as though they're lost and we can just ignore it. And I'm not even sure what we do if we can't locate those things. Arguably there's perhaps a capital loss that happens on the passing, but we know we disregard capital losses on death. So it's an interesting one. They probably just go to the grave with them, but let's assume we do have all the ability to access the information. It's an interesting question as to how beneficiaries or estates then have to deal with these sorts of assets, because there's going to be enormous wealth in them.

Tracey Dunn:
Potentially. And it's a really interesting area because how do you, if there's no centralized register where you can search to see if somebody actually holds these assets, how do you identify where the wallets are? And assuming somebody has left the passwords and you can access them, then yes, an executor of an estate is then going to have to work out, how do you deal with that within the estate? What does a will say? Was the cryptocurrency left to a specific beneficiary, or does it just form part of the estate? Are you required to realize it to meet estate costs? And then if you've realize it's not cryptocurrency anymore, it's just normal currency. So some really interesting issues there. And then you might have recipient beneficiaries under a will. How do you transfer the cryptocurrency to them?

Robyn Jacobson:
Particularly if that beneficiary is not particularly interested in the crypto world.

Tracey Dunn:
Yeah.

Robyn Jacobson:
Which case it potentially does need to be crystallized and converted back into fiat currency again.

Tracey Dunn:
Yeah.

Robyn Jacobson:
Look, Tracey. I don't think we've even scraped the surface of all these issues, but it's been fascinating to take a walk with you through this amazing new world. Thank you so much for your time.

Tracey Dunn:
Thank you so much again, Robyn.

Robyn Jacobson:
Thanks for listening to this episode of TaxVibe. I've been chatting with Tracey Dunn of RSM Australia in Perth. 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 on social media, follow The Tax Institute on LinkedIn, Facebook, Instagram and Twitter. You can join the conversation on our member only community forum at community.taxinstitute.com.au. Not a member of The Tax Institute? Join a collective voice of 15,000 practitioners at the heart of the profession and find out what the best of tax professionals have in common. For more information, visit taxinstitute.com.au/membership. You can also contact us by emailing taxvibe@taxinstitute.com.au. We look forward to you joining us next time.

Episode 18 — Unpacking the ATO’s section 100A draft guidance

Release date: 6 May 2022

In this episode of TaxVibe, Robyn chats with Jonathan Ortner, Tax Director, Arnold Bloch Liebler, about section 100A of the Income Tax Assessment Act 1936 that deals with trust distributions and what the ATO’s recent draft guidance materials mean for you and your clients.

They explore:

  • What section 100A is and why it’s in the spotlight at the moment
  • The conditions under which section 100A applies and its requirements
  • Guidance from cases including East Finchley, Prestige Motors, Idlecroft and Raftland
  • Where to from here for section 100A, including the pending court appeal in Guardian

Host: Robyn Jacobson, CTA 
Guest: Jonathan Ortner, FTI

 

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 professions great thought leaders who will share valuable and practical insights you may not hear every day. We hope you enjoy this episode of TaxVibe.

Robyn Jacobson:
I'm joined by Jonathan Ortner. Jonathan is a partner in Arnold Bloch Leibler, Sydney taxation group. He practices in all areas of direct and indirect tax with a particular focus on the taxation of trusts and corporate income tax and mergers and acquisitions. Jonathan has particular experience in dealing with the ATO on complex tax issues in a dispute resolution context. He is a keen and active member of the tax community, as well as presenting on tax topics at various sessions and authoring a number of published articles, papers and bulletins. Jonathan is the deputy chair of The Tax Institute's national SME technical committee, and is recognized as a key tax lawyer in the legal 500 Asia Pacific. Jonathan, a very warm welcome to TaxVibe.

Jonathan Ortner:
Thanks Robyn, thanks for having me today.

Robyn Jacobson:
It's wonderful to have you on board. We recently had you join us for a member only webinar run by The Tax Institute as part of a panel with the ATO. We were focusing on section 100A, which will be our focus today. So very pleased to get you back again. I just want to set the scene for our listeners. I'm describing this as the biggest development in the taxation of trust income in more than 10 years. The 23rd of February this year, the ATO released long awaited draft guidance materials on section 100A. And what I'd like to do with you is unpack this provision, understand what it is, what it does and broadly, why is there such concern across the tax community about the guidance materials that have been released? So the materials without diving into specific details now are broadly three products. We have a taxation ruling, TR 2022/D1, a draft practical compliance guideline PCG 2022/D1 and a taxpayer alert TA 2022/1. So with that overview, could you run us through what exactly is 100A and why is it in the spotlight at the moment?

Jonathan Ortner:
Sure, 100A is a specific anti-avoidance provision, which was originally designed to counter tax avoidance through trust stripping schemes. But it also remains a clear threat in any circumstance that involves the distribution of trust income, where cashflow is not aligned with the legal entitlement and the enjoyment of the benefit of the funds by the beneficiary is deferred or does not eventuate. The provision works by effectively deeming there to have been an accumulation of trust income by the trustee with the result that the trustee is assessed at the highest marginal rate of tax.

Jonathan Ortner:
As to why it's in spotlight, the section has been part of the Australian tax landscape, as we know since 1979, but it's only recently become an area of significant focus within the ATO. It's certainly a fair question as to why it's in the spotlight. What currently concerns the ATO is factual situations where a beneficiary is made presently entitled, but at the end of the day, someone else benefits. So perhaps in their view, this has become more prevalent and a crackdown is warranted. However, in saying that discretionary trust have been the subject of intense scrutiny by the ATO over the last 15 years. This to me really appears to be just another attack on trust, more broadly. Their initial public views on 100A, expressed as far back as 2009, which was at the same time as the issues relating to UPEs and division 7A led to tax payer concern and cause for guidance material. So it really was inevitable that we would end up where we are. And as I always say, be careful what you wish for.

Robyn Jacobson:
Can you provide some insights as to why this has now got the momentum that it does? What was the Genesis for the ATO starting to focus on this provision given it's been around for more than 40 years?

Jonathan Ortner:
I think just going back to what I said previously, in terms of why the ATO is focusing on it, perhaps it's in relation to just their broader attack on trusts or their genuine dislike for entitlements or the cash not flowing with the entitlements. So this has prompted them to release guidance on their views in relation to the application of 100A. We first saw their comments in 2014, where they provided examples of the types of arrangements that they thought 100A applied to. And when the ordinary family or commercial dealing exception might apply. On the back of that significant concerns were raised by advisors and taxpayers in relation to the way that the commissioner was proposing to apply 100A, which was far broader than previously applied by the ATO and arguably far beyond its intended scope. And so that really resulted in a demand for a proper guidance product, so that advisors and tax payers understood what risks existed in relation to the types of arrangements that were otherwise previously thought to be common to private family groups.

Robyn Jacobson:
There's been no shortage of seminars and discussions and conference sessions discussing 100A in the last five to 10 years. And anyone who sat through the ATO speaking about 100A would understand that it has been on their radar and many practitioners have also been putting out cautionary tales about the scope of 100A. So this still seems to have caught the profession by surprise, given the scope of the guidance that's now been published. Why do you think that is?

Jonathan Ortner:
The ATO's taking a strict view on certain aspects of the law, which appears to be contrary to past practice. The way that the Commissioner is now proposing to apply at 100A, again, arguably goes far beyond its intended scope. Examples include typical family dealings, which advisors otherwise believe fell within the ordinary dealing exception. That includes arrangements like the retention of trust funds, the gifting or assignment of UGEs and the utilization of losses. And as a result of that, most private groups could in some form be distributing trust income in a way that puts them in the ATO's red zone. That's possibly prompting a review or audit action. So taxpayers are really bound to be upset given this new approach by the ATO and the fact by the way, that there's no limit of amendment period.

Robyn Jacobson:
So let's unpack the provision a bit more so we can understand how it operates. It has been around in the law since 1979. It took effect in 1978, which was the original date of announcement. How does the provision work? What are the conditions that trigger 100A?

Jonathan Ortner:
The first thing to note with 100A is, it's self executing and it applies if the criteria of its operation exists. So unlike, for instance, the provisions of part 4A, 100A is not made depending on a determination being made by the Commissioner. That's the first thing to know, so taxpayers must self-assess. For 100A to apply there are a number of key requirements. The first is that there must be a beneficiary who is presently entitled to a share of the income of the trust estate, whether actually, or on a deemed basis. There must be a reimbursement agreement, which will be the case where firstly, there is an agreement and the broad definition of which does not include conduct or a transaction entered into, in the course of an ordinary family or commercial dealing. The identified agreement must provide for benefits to someone other than the presently entitled beneficiary that may or may not be equivalent value to the incoming question. And the identified agreement must have been entered into with a tax reduction purpose. So we need a present entitlement, we need a reimbursement agreement and we then need that present entitlement to arise out of the reimbursement agreement. So a lot to chew through, but at its simplest level those are the key requirements.

Robyn Jacobson:
All right, let's unpack some of that. So with the beneficiary who must be presently entitled, are there any conditions around what sort of beneficiaries we're talking about?

Jonathan Ortner:
Yes, a beneficiary under legal disability will not be caught by these provisions, but otherwise, a beneficiary presently entitled will be caught.

Robyn Jacobson:
All right, so that would exclude our minors and people who are bankrupts and so on.

Jonathan Ortner:
Correct, and you'll see an example in the Commissioner's tax ruling, I think it's the tax ruling, not PCG, that talks about a minor being entitled to income in a testamentary trust where 100A won't apply until such time that minor turns 18. And then, obviously the provision may be switched on, it needs to be looked at.

Robyn Jacobson:
All right, reimbursement agreement. It sounds like I've incurred something and I'm going to be reimbursed for that amount. Does that have any relevance whatsoever to what we're talking about here?

Jonathan Ortner:
I think the thing to note and what the courts have said is that you can't break up the term reimbursement agreement and just focus on the ordinary meaning of reimbursement and try and work out what that actually is. You've got to look at the provision which define a reimbursement agreement. And really that involves a situation where benefits go to someone other than the presently entitled beneficiary. That can be at it's very simplest form, you, Robin being made presently entitled to $100, but that $100 going to me instead, that's a reimbursement agreement potentially because I'm receiving the benefit and you're the one entitled not getting the benefit of cash.

Robyn Jacobson:
And that could be money paid to you by the trust? It might be an asset being transferred across to your property? It could be services being provided? So it's quite broad.

Jonathan Ortner:
It could be by the trustee, that's one thing to note. Or the cash could flow to you and you could give it to me. So that's still a reimbursement and that's important to remember. It doesn't only involve situations where the cash doesn't flow to you. It's where the cash doesn't stay with you necessarily.

Robyn Jacobson:
Isn't my choice? If I'm made presently entitled, I get my $100 from the trust, and then a week or three years later, I choose to then gift it to you. What's wrong with that?

Jonathan Ortner:
Well, it depends as always on the facts and the arrangement. So, three years down the track with nothing more will not invoke this revision. But if there's repeat behavior of the gifting of entitlements and there's clear evidence of an arrangement that has been entered into with a view to reduce tax on that entitlement, then you need to be aware of this provision as it may apply.

Robyn Jacobson:
Perhaps the way I could describe it, Jonathan is, it's a separation of the cash from the benefit as you were articulating in your opening comments. If there's a situation where someone is being made presently entitled, but they ultimately don't get to keep that amount because there's an arrangement to pass it on. And the typical arrangements we've seen is where the adult child who's at university or on a low income, they get topped up to one of the income thresholds so that they're still below the top marginal tax rate, but able to benefit with those marginal rates. Then they're passing the benefit of that distribution on to their parents who if the parents had received the distribution from the outset, would've been taxed, presumably at the top marginal tax rate, given the dollars involved. So I think that the ultimate problem here is you've got someone who, if it was always intended the parents get the distribution. Why then did you distribute to the adult child? Why didn't you just give it to the parents originally? And it comes into this third element about the tax purpose and why you did it. There might be 50 reasons why commercially you did it, or for family reasons but you were talking about how there's a purpose of reducing or deferring income tax. Now, the purpose of using the marginal tax rates might be just one of those purposes. Is that enough to potentially get us into this provision?

Jonathan Ortner:
I think just one point before we go there to note is that the example you just described is something that many advisors would've otherwise felt previously fell within the family dealing exception. And so that's a reason why many are upset. The other thing to note is that a reason for doing or a reason for giving effect to an arrangement in a way that you described. So as to increase the wealth of the family group on a post tax basis is not accepted by the ATO as being something that has at its pursuit or in a familial end. I just wanted to make those two points.

Jonathan Ortner:
In terms of your question, there's two parts to this. The first is to work out whether the ordinary family or dealing exception can apply and embedded within that is some consideration of purpose of the arrangement and whether it's motivated by tax or not. Now, if tax, taxating is sort of incidental to the overall pursuit of the familial end, then the Commissioner says that it won't be one that is set with a tax avoidance purpose, and perhaps may come within the exception. If for whatever reason it doesn't come within the exception, then you still need to go through the other requirements of 100A. One of those requirements is the tax reduction purpose requirement. And really all you need to find there is a purpose of achieving a lower amount of tax than what otherwise might have been paid in a counterfactual, a reasonable counterfactual scenario. And if the answer to that is yes, then you may fail the tax reduction purpose.

Robyn Jacobson:
This is why it's so much broader than part 4A, you've already mentioned that it's got an unlimited amendment period, whereas part 4A has only four years. Secondly, part 4A of course, has a sole or dominant purpose of entering into the scheme or the arrangement. Whereas this is a purpose. So it seems to be so much easier to full foul of 100A than it does part 4A.

Jonathan Ortner:
Well, definitely because it doesn't require, at least in the context of the tax reduction purpose requirement, it doesn't require a dominant purpose. There's no dominant purpose test. So it's just a purpose, no matter how minor that purpose may be, that's enough to fail the, or satisfy rather the tax reduction purpose. So yes, and the other thing to note though, as well is part 4A is an objective test. There's elements of the tax reduction test that require subjectivity to come into it, to get into the mind of the relevant person that had the tax reduction purpose. That's also a key distinction.

Robyn Jacobson:
Back to real world, we've unpacked all this theory and we've explained what the provision does, but in practice, how does any practitioner or taxpayer work out whether or not they have fallen foul of 100A? You say it's a self-assessing provision. So it's not relying on a determination by the Commissioner. How do we know where the goalposts are, or the red flags down at the surf beach to know whether or not we are within that safe zone or whether we've fallen outside? It seems incredibly gray.

Jonathan Ortner:
Yeah, what we know from cases such as Prestige Motors and IDLECROFT is that the examples given in the extrinsic materials were intended to be illustrative and not an exhaustive statement. Som what we might have previously thought of being the types of arrangement, subject to 100A, like blatant and complex trust stripping schemes. Schemes devised by promoters involving artificially created paper losses. Those aren't the only types of situations where 100A can apply. Really it's a provision that remains a clear threat in any circumstance involving trust distributions, where cashflow is not aligned with the legal entitlement. If that's something that arises, you really need to take a step back and look at the arrangement in its totality, work through the provisions of 100A and ask yourself whether you're caught out.

Jonathan Ortner:
In my opinion, the [inaudible 00:17:03] of scheme 100A was introduced to counter, I think are important to establish some sort of practical boundary between what is okay and what is not. So it's not as simple as taking the Commissioner's examples in the tax ruling and the PCG and putting your hand up and conceding that a 100A applies, that won't always be the case. I think you really need to drill down into the cases into the extrinsic materials, into the provision, understand the context and the purpose, and take a proper approach to statutory interpretation, to work out whether your particular arrangement is caught.

Robyn Jacobson:
Let's take a look at some of the cases that have come before the courts and particularly some of the high profile cases and what do they have in common? And is there something unique to those cases that we took some comfort from and therefore dismissed 100A is being relevant to the sorts of arrangements that are typical in family groups?

Jonathan Ortner:
The four cases that we're all familiar with are Prestige Motors, IDLECROFT, Raftland, East Finchley, and now obviously Guardian, but I'll leave that to one side for now. Judicial consideration of 100A appears to have started with Dr. Thomas and East Finchley and he migrated to Australia in 1978, established a discretionary trust and established a discretionary trust with a corporate trustee. In 1983, the corporate trustee distributed the income of that trust to various persons who were relatives of Dr. Thomas and valid objects of the trust. This included 126 relatives who were overseas residents and who received $585 each, which was neatly the tax free threshold for non-residents at the time. So no tax was paid in that situation.

Jonathan Ortner:
In Prestige Motors, there were three separate transactions that were largely centered on the transfer of a business to a unit trust and units being issued to a company with losses and to a tax exempt organization. Again, the arrangement had the purpose of allowing the business profits to be distributed effectively tax free.

Jonathan Ortner:
In IDLECROFT a joint venture between various trusts was put in place where the trustee of those trusts inserted a beneficiary that had substantial tax losses and so paid no tax upon the appointment of income to it.

Jonathan Ortner:
Finally, Raftland, although a very complex case and one that the high court ultimately found to be the subject of a sham involved, the introduction of unit trust with substantial tax losses and entitlements not being paid in cash other than a single sum of a small amount. And there was some evidence that there had never been any intention of making any further cash payments. So we can certainly see a trend here. It was only the egregious paper schemes that previously came before the courts, and that appear to reflect the types of arrangements, the extrinsic materials that a 100A was inserted to stamp out. So rightly or wrongly many believe these cases provided a sort of limiter on how broadly 100A could be applied.

Robyn Jacobson:
So if we combine the decisions in these cases, all of which I think we can comfortably describe them as being egregious or blatant schemes.

Jonathan Ortner:
Yes.

Robyn Jacobson:
Then we also look at the wording in the legislation, ordinary family or commercial dealing of which there has been little to no guidance on the meaning of that term, and certainly no judicial guidance until very recently. And that itself in Guardian as the subject of a full federal court appeal. It's no wonder that practitioners looked at these situations and thought, well, what I'm doing, therefore doesn't fall within 100A because we can take some comfort from this safe harbor being the exemption for the ordinary dealing. So there's been quite a significant shift. The question is whether there's been a shift in the original policy intent from the late seventies to what the law is doing today, or whether there's been a shift in the way that practitioners understand the provision to work?

Jonathan Ortner:
I don't think that there's necessarily been a shift in the way that practitioners believe the provision to operate. I think the reality is no one knows how it operates, particularly in relation to the ordinary dealing exception, we are all including the Commissioner, we're all making it up as we go. And we're really waiting on the courts to provide some firmer authority on what some of these terms mean. So I think that if you look at it from a policy perspective and the time at which this provision was inserted back in the 70s, which was a time that was the bottom of the harbor schemes, the policy intent behind the provision is certainly in my opinion, different to the way the Commissioner is now administering the provision.

Robyn Jacobson:
It's hard to think of any other provision in the tax law that has been there for as many decades as this one that is so poorly understood. And we're all struggling to understand how it applies in practice. It shouldn't be this difficult.

Jonathan Ortner:
It shouldn't be, but that's, I guess, Australian tax law for you and it's probably not the only provision... Well, it's definitely not the only provision that's been around for a long time. That has a lack of clarity and uncertainty about it. A very simple one that comes to mind is 99B, that was also inserted at the same time as 100A and that is also a provision that has been drafted in a way that is incredibly broad, that applies to trust. But what kind of trust non residents or Australian trust is something that remains debated until today.

Robyn Jacobson:
So the case that remains before the courts at the moment, Guardian, can you briefly explain what was going on in that case and how helpful is this? Does it share any similarities with those previous cases you mentioned?

Jonathan Ortner:
I would say that it doesn't really share the similarities of the previous cases. It's a case that certainly introduced more commonly encountered family group dealings or concepts. I'll give you just the facts that follow us down a pattern to give the listeners some context. Guardian was the trustee of a discretionary trust, and it also owned all of the shares in the company, which was one of the beneficiaries of that trust. In three financial years, Guardian made the company presently entitled to a share of the trust income. Then in the following year, sufficient cash was paid by the trustee to the company to allow the company to pay tax on the net income. Then the balance of that entitlement remained unpaid, and having paid tax on the net income, the company could then declare a fully franked dividend to its shareholder being the trust. The trust would set off the dividend against the balance of the unpaid entitlement that was owing to the company. Then the trust would stream the franked dividend to Mr. Springer, who was a non-resident at the time, and so no further tax was paid.

Jonathan Ortner:
In essence, the income was sheltered at the corporate tax rate of 30%. It was this that the Commissioner took issue with. It is a fact pattern that is far removed from the types of egregious schemes that we might have previously become accustomed to where you've got low or no tax introduced beneficiaries, where you've got promoters of tax schemes, where you've got entities with significant tax losses. Here, we have pretty much a family group dealing with tax being paid still at a fair rate of 30%, but it coming within the ATOs view of 100A.

Robyn Jacobson:
It does display some features that were described in the ATOs July 2014 guidance, which has been described in the vernacular as the washing machine.

Jonathan Ortner:
Yes and no. I mean, it wasn't a strict washing machine in that it was going round and round and round. It was going to the company and then back to the trust and then out to a non-resident. So I guess, it was incorporating elements of it. It was also incorporating elements of other types of examples the commission doesn't like where distributions are going out to non-residents and no further taxes being paid, and it's capped at either withholding tax rate or because we've got a franked dividend, there is no withholding tax.

Robyn Jacobson:
Can you comment on lessons we can learn from Guardian, which as I say again, remains on appeal before the full federal court and could ultimately go to the high court that remains to be seen. But in terms of the credibility of the taxpayer and their advisor and the quality or otherwise of contemporaneous documentation?

Jonathan Ortner:
The case largely turned on the facts. But at the end of the day, the taxpayer won because of the strong contemporaneous evidence. And because Justice Logan was persuaded by the credibility of the witnesses and oral evidence provided, The contemporaneous documentation included emails and file notes, which corroborated the oral evidence provided. Justice Logan said, 'I thought each of these witnesses offered honest, candid, consistent evidence, which also sat well with this correspondence.' So it was not as though there was a significant amount of evidence. It was just that the evidence came together in a way that properly supported what was being said by each witness and made sense in the context of the overall affairs of the taxpayers group. So the key takeaway for me, is remembering the importance of the whole picture, an oral statement without nothing else will not be sufficient. That an oral statement that is affirmed by the surrounding events that unfolded and even basic documentation, such as emails, file notes and aid memoirs will be given significant weight.

Robyn Jacobson:
Really important to understand and learn from. So in terms of moving forward from here, there's been a lot of discussion around the retrospective application, whether this is fair, how broadly the ATO should apply the guidance to taxpayers and what should taxpayers do? Just before you answer that, it's worth noting that this guidance is currently available for consultation and those consultations close in a couple of days, time and The Tax Institute, like many others will be putting forward submissions with our views and our concerns, but in terms of the retrospectivity, this is probably the biggest issue that is concerning the profession.

Jonathan Ortner:
Yeah, it is absolutely. It's certainly what has received the most attention outside of arrangements that many thought were otherwise family or commercial dealings. Really several examples set out in the guidance material reflect what many believe to be taxpayer practice for the last 20 to 30 years. The examples provided are not necessarily egregious and the Commissioner has not previously as a matter of practice audited or queried those factual scenarios, including at the time, since the commissioner issued his website guidance and the 2014 financial year. Certainly I've seen in practice in various reviews or disputes an opportunity for the Commissioner to apply 100A when he didn't and this was post 14. So the change in attitude by the commissioner arguably represents a U-turn according to many advisors, and it's understandable. Then why many believe the approach being taken by the commissioner is unfair.

Jonathan Ortner:
The commissioner believes the white zone compliance approach in the PCG is sufficient. I disagree, the white zones blurred by its various exceptions and the 2014 website guidance was, and really remains confusing. And in my mind, it's not an appropriate date for a line to be drawn, particularly in relation to the non egregious examples in the draft guidance material. This view seems to be shared by the government and opposition who've also articulated their concern regarding the potential application of the draft guidance material on a retrospective basis. It's my view, which I previously expressed on the panel presentation that the guidance materials should operate on a prospective basis only, from the date that the draft materials were released, not from obviously when it's finalized, because we're now aware of the commissioner's views.

Robyn Jacobson:
It's also interesting to note the recent media release issued by the Assistant Treasurer, Michael Sukkar, who made the comment that the ATO would not be applying this retrospectively and that anyone who was relying on the July 2014 guidance, where that would give them a more favorable outcome than the ATOs draft guidance could continue to rely on that, but went further to say that they would be looking at this closely and after the election and I understand that both the government and the opposition have made this undertaking. It remains to be seen who forms government after the 21st of May, but both have committed to looking at the provision and if necessary making legislative change. Now with that said, and that's comforting to hear that. I think it's also important to acknowledge that generally there would be a preference or a leaning towards administrative approaches by the ATO, rather than trying to amend the law.

Jonathan Ortner:
I think an administrative approach might be an interim solution, but I don't think it's a permanent fix. I think legislative change is important here. The reason for that is when you... There's really not many, or if any reason, given for why 100A was thought to be a provision that should be subject to an unlimited amendment period. Perhaps at the time when amendments were made to section 170, which dealt with amendment periods, it was thought that the egregious paper schemes of that time were such that the commissioner needed an unlimited period to be able to actually uncover those sorts of arrangements much like that is the justification for fraud or evasion cases and why there's an unlimited amendment period. But when we break it down now, and we think about the way the Commissioner's trying to apply the provision in practice, and it's really to a set of fact patterns that arguably part 4A could also apply to, which is subject to a limited amendment of four years. I see no reason why from a legislative perspective, 100A should not be subject to the same four year period as other types of specific integrity provisions.

Jonathan Ortner:
Now, if an administrative approach is going to be applied, the Commissioner could take a similar approach to that, which he does involving trustees of discretionary trust that aren't issued with assessments, so that where there's evidence that there has been no fraud or evasion, the commissioner will limit his review of cases involving 100A to a four year period. And that seems to be a sensible approach to take until we have a legislative fix, if we ever get one.

Robyn Jacobson:
What should taxpayers do now? How can they prove their situation or substantiate their circumstances or decisions they've made? Particularly where if you're trying to show there is not a reimbursement agreement in place, how do you prove that something didn't exist?

Jonathan Ortner:
This might be a vapid comment, but I think taxpayers should think seriously about whether 100A might apply to the set of facts in motion first. Substantiation is not about creating evidence that leads to misdirection. It's about lending support, to refute arguments that the Commissioner might advance and prove the facts in issue. At the end of the day, it is the taxpayer that bears the owns of proof. So maintaining strong evidence is always essential, whatever the tax matter might be. Once it's established that 100A ought not to apply or it's reasonably arguable that it ought not to apply. Then the answer is to your question that is, it depends. It depends on what the relevant arrangement or lack of arrangement entails.

Jonathan Ortner:
In Guardian, the documentary evidence was simple, emails, file notes, aid memoirs, and actions taken by Mr. Springer, which supported his statements regarding the need for asset protection and simplifying his life, going into retirement, everything was consistent, and what was said was able to be corroborated.

Jonathan Ortner:
My suggestion would be to think about what it is that you're doing, ensure that what is said, or what is being done rather is defensible. And so in some instances, a reasonably arguable position paper might be obtained from a qualified tax professional. In other instances, it will be about proving how the arrangement in its totality sought to achieve primarily commercial or familiar [inaudible 00:33:15]. And in more simple cases, it might just be about retaining basic documentation, such as in Guardian's case. There's no one size fits all.

Robyn Jacobson:
There are two further issues that have come up that seem to have antagonized the profession. That is in the taxpayer alert where the Commissioner talks about referring agents to the Tax Practitioners Board, where they've been involved in promoting these arrangements to their clients. And secondly, potentially applying promoted penalties to such arrangements. What are your views on both of these?

Jonathan Ortner:
Personally would not worry about it. It's been blown out of proportion. The assistant Commissioner Justin Dearness came out and said that taxpayer alerts have, and I'll just read what he's actually said, 'Have a standard way of being presented. And they are meant to identify the full range of remedies that might be available for anyone operating the market.' So he said, don't take this general messaging as an indication that the ATO is out there looking for referrals. And the promoter penalty laws are not intended to obstruct tax advisors and intermediaries from giving particular advice to their clients. For what it's worth, and I said this again on the panel as well, I think the tax alert should be withdrawn. It could have probably been dealt within the PCG, and I really don't think advisors should be concerned about some of the statements in that alert, although I accept that those statements should not have been made in the first place.

Robyn Jacobson:
So Jonathan, as we pull this to a close we're waiting on the appeal in Guardian, there are potentially more court cases in the pipeline. We're waiting for the ATO to finalize their draft guidance materials, which may or may not happen before the Guardian matter is resolved. We're still waiting to see exactly what compliance activity the ATO will undertake. There's a bit of uncertainty here for practitioners. It makes it very challenging.

Jonathan Ortner:
It does. I suspect the full court... I think they sit again in may and then August. I think Guardian won't be heard again until later this year, so we may not really find out anything more until 2023 on this case. I do know that there are other arrangements that are currently before the court. Some of which reflect the examples in the draft guidance materials. So it will be a case of watch this space, because I think that there's a little more action to come and I don't really think that guidance materials will be finalized before the end of this financial year, given the election, the cases before the courts and the current market reaction. They'll need to seriously take into account. All submissions provided by relevant stakeholders. So we've got a bit of a way to go still, Robin.

Robyn Jacobson:
I would suggest the submissions are going to be very extensive.

Jonathan Ortner:
I'd say so.

Robyn Jacobson:
Jonathan, thank you so much for your time and your insights today.

Jonathan Ortner:
Thanks very much Robin, for having me.

Robyn Jacobson:
Thanks for listening to this episode of TaxVibe. I've been chatting with Jonathan Ortner of Arnold Bloch Leibler in Sydney. 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 on social media, follow The Tax Institute on LinkedIn, Facebook, Instagram, and Twitter. You can join the conversation on our member only community forum @community.tax institute.com.au. Not a member of The Tax Institute? Join a collective voice of 15,000 practitioners at the heart of the profession and find out what the best tax professionals have in common. For more information, visit taxinstitute.com.au/membership. You can also contact us by emailing TaxVibe@tax institute.com.au. We look forward to you joining us next time.

Episode 17 — Tax and technology: transformed 

Release date: 22 Apr 2022

In this episode of TaxVibe, Robyn chats with Alan FitzGerald, Founder of Practice Connections Advisory, about tax and the current technology landscape, including:  

  • Digital disruption and how practices have become agile during the pandemic 
  • The current state of tax and accounting software  
  • The future of technology in tax and the impacts of solutions like Artificial Intelligence  

Alan has spent over 30 years in technology, with 23 of those just in tax and accounting software. He now offers independent and technology agnostic advice to firms big and small.

 

Host: Robyn Jacobson, CTA, The Tax Institute

Guests: Alan FitzGerald, Practice Connections Advisory

Robyn Jacobson:
(Silence). 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 professions great thought leaders, who will share valuable and practical insights you may not hear every day.

Robyn Jacobson:
We hope you enjoy this episode of TaxVibe. I'm joined by Alan FitzGerald. Alan has spent over 30 years in technology with 23 of those just in Tax and accounting software. In 2015, based on demand from several accounting firms, he established Practice Connections Advisory and offers independent and technology agnostic advice to firms large and small in areas such as practice management, workflow, tax, document management and reporting solutions options.

Robyn Jacobson:
Alan is regularly engaged to write and speak on the accounting tech market by The Tax Institute, CPA Australia and Ireland and Chartered Accountants Australia, New Zealand. He is also regularly engaged by corporate organizations to assist with developing accounting and finance technology strategies, as well as by vendors to assist with their future product development.

Robyn Jacobson:
Alan's experience working with Tax and accounting software, along with his industry insights makes him the perfect buyers advocate. He's independent, tech agnostic, always willing to share his knowledge. And it's great to have him here. So just as a side note, I first met Alan about four years ago.

Robyn Jacobson:
Alan was part of a panel discussion that I was facilitating on work related expenses, so very much in the individual's tech space. At later stage in the panel, there was a question from someone in the audience asking about Country-by-Country Reporting, which is polls apart from work related expenses.

Robyn Jacobson:
And to my great surprise and with great agility, Alan easily answered the question. And I remember going up to him and saying, "Who are you?" So Alan, it is great to have you on TaxVibe. And just before we get underway, a mention that we are not endorsing any of the products. This is a general discussion about what solutions are out there now. So Alan, welcome to you.

Alan FitzGerald:
Hello Robyn. Thank you. It's wonderful to be here today.

Robyn Jacobson:
So we are into 2022, it's been interesting ride over the past couple years. What have you been seeing in the technology space and particularly the ability or otherwise for practices to pivot towards this remote working environment?

Alan FitzGerald:
Look, I think everybody would appreciate that the last couple of years was not on the bingo card, if we could say that. It certainly wasn't one of those items that could be ticked. And I think the firms and the organizations for that matter that were able to manage that appropriately, and what I mean by that is the ones that had a setup that enabled them to be able to, hey, it's a horrible word, but pivot, from being in the office to be able to then work from home was the success for a lot of organizations.

Alan FitzGerald:
Now, when I say success, I don't mean the organizations that weren't in that space, collapsed or went out of business, but they certainly found it a lot harder. And I think part of that was driven by, there's a great curve. I use it a lot. It's called the Everett Rogers diffusion of innovation curve. Now, that's a bit of a mouthful, but it's fundamentally, you have on the very left-hand side, you have the innovators.

Alan FitzGerald:
And on the very far right-hand side, you have the laggards. And it's a bell curve basically. And across that you have the early adopters, the early innovator, et cetera, et cetera. Anyone who was on the left-hand side of that curve had a far easier way of working from home, in essence, in the professional field.

Alan FitzGerald:
Anyone that was on the right, and they were generally the ones that reliant on in-house systems or in-house client servers or everything was done within the four wall. They had a bigger issue to working from home because generally their remote access systems only allowed one or two people to concurrently access the systems. Whereas those on the left-hand side of that Everett Rogers diffusion curve, could allow anybody to access the systems.

Alan FitzGerald:
So if you are on the right-hand side of the curve and suddenly you had to send 20, 30 people at home, then you had a lot of problems. And that was really, I guess, the genesis for me and for a lot of the other similar advisors out in the marketplace is how do we pivot from this older way of doing things to a newer way of doing things so we don't have these issues?

Alan FitzGerald:
And I think that was probably the biggest lesson that has come out of the whole event. And there's been a lot of talk, Robyn, you may have seen some of those polls, what has been your IT strategy? What has been driving it? And at the top of it is COVID 19. It is just an issue that a lot of firms have faced and a lot of organizations too.

Robyn Jacobson:
Alan, you remember back in 2000 when the GST was introduced.

Alan FitzGerald:
Oh, I remember.

Robyn Jacobson:
It was a new system, and it took thousands upon thousands of businesses out of what used to be the shoebox full of receipts into automated accounting software for the very first time. And of course, that practice or behavior has been sustained.

Robyn Jacobson:
What are your thoughts on the change that we've seen with accounting practices and also law firms? Any professional practice really, that is using the word you've used already, pivoted, to this online space and remote learning. Surely, this is now sustainable. We're not going to go back to how it was, are we?

Alan FitzGerald:
Oh, no, absolutely. I think it is sustainable. I saw an advert in the, it might have been in the US, where they weren't hiring by a geographic locality, i.e., if you are in New York City or if you are in, I don't know, Kansas or something like that. They were hiring by time zone. So if you fitted into a particular time zone, they wanted to talk to you.

Alan FitzGerald:
And so this whole work from anywhere scenario, and we see this with property prices in regional areas around Australia, because people have gone, why do I need to live in the city when I can actually do all of my work quite satisfactorily from a remote location? Now, obviously, you miss out the whole social interaction component of.

Alan FitzGerald:
That there is absolutely an element to that, but there's nothing stopping people from working remotely. I've worked remotely now for, in essence, six and a half years with Practice Connections. And I have to say, my business has doubled, tripled every year since inception. It hasn't been a barrier to what I do.

Alan FitzGerald:
Now, I can understand when you've got a multidisciplinary firm or you've got a larger organization that you do need to have those interactions on it on several days. So what we'll definitely see is that whole three days in the office, two days at home, potentially, or vice versa.

Alan FitzGerald:
The knock-on benefits for that for organizations is the fact they don't necessarily have to hire bigger offices because they can actually save on real estate. So there's a couple of knock-on benefits can come out of this, but it's only, I guess, from the legal, and if we focus in on the legal and accounting fraternity, it's very particular to those markets.

Alan FitzGerald:
So it's very difficult for a welder, for example, to work from home. Or you'd know this example, an airline pilot, you don't necessarily want your airline pilot working from home. Right? So there's certain professions where it's simply doesn't work, but there's other professions where it does actually work quite well.

Robyn Jacobson:
So in terms of moving into the current landscape, we've looked at the past couple of years and how firms have shifted. And there are still some firms to go through that process. There are many that have maintained, we want this paper environment. We like the way our work papers are operating and our processes and that suits us.

Robyn Jacobson:
Now, that is of course their decision. And there's a lot of pressure from government and from the ATO to move into more digitalized space. And even, some of the budget measures we've seen this year further that objective. The government is very much trying to get everyone into a digital space. Having a look around the current landscape, what are you seeing?

Alan FitzGerald:
There is a definite move to more, it's called the holistic systems. And what I mean by that is that, the challenge for accounting firms, in which we focus in on accounting firms just for the moment, is that they build up processes based on the constraints of the software that they use. So you get used to a particular software, you know it's pros and it's cons and it's pitfalls.

Alan FitzGerald:
And so you build up a series of workarounds. It's very difficult some times to change to another system because you have to unwind all of those processes and all of those, the workarounds that you have. There's a great quote by a guy called James Clear in a book, that he said, "You don't rise to the level of your goals. You fall to the level of your systems."

Alan FitzGerald:
And so it's basically, you're hemed in by what because you're used to what that system actually delivers. So when firms ask me to come in and talk to them, I say, "Just start with a clean slate. What would you like to do? And if you had no constraints on what you were able to do, what would you like to do?" And it's quite incredible when they say, "Oh, we can't do that because the system."

Alan FitzGerald:
I say, "No, no, no, no. Forget about the system. What do you want it to do, so we'll get the core basics out of it?" Because technology these days can fundamentally do anything you want it to do, but that comes with two caveats. And the two caveats are your appetite for risk and how deep your pockets are. Right?

Alan FitzGerald:
And so it's one of those things, you can go with a series of solutions that are out in the marketplace that play, I call the term play beautifully together. So it's like kids in play group. Do they play nice together? Yes, they do. Great. So when they play nice together, they start sharing and it's a good way of doing information.

Alan FitzGerald:
So those pitfalls that we're previously holding back firms, they're suddenly realizing, oh my God, we can either automate or all of this stuff or there is actually a better way. Because the way that software has developed particularly over the last five years is that you have a series of individual vendors that are basically saying, "We're just going to do this bit."

Alan FitzGerald:
"And you know what, we're going to try and make it as good as we can. And we'll connect it to all of these other pieces." And those other pieces are going, "Yeah, going to try and be the best we can over here as well." So what you end up is this best of breed scenario rather than a suite. Because a suite, they always have to compete for price.

Alan FitzGerald:
And that each element of that cannot be a best of breed, because it just simply goes against the grain. So what's happening now is this evolution. And I actually wrote a post about it on LinkedIn the other. Because the main vendors in the marketplace in Australia today, so reckon APS, MYOB, Sage, Handysoft.

Alan FitzGerald:
They were the guys that were creating the suites and they told the market for many, many years, "You have to have a suite to compete. A suite is the only way to go." They are now literally disintegrating all of their products. So they're basically saying, "We're going to do a few elements of this. We're going to try and do this as good as we can, but we're going to start pulling in the ability to interact with other third-party applications."

Alan FitzGerald:
So that has impacts on those organizations, but it also has major impacts on the client base, because the clients are now going to go, "Oh, hold on a second. If you're not going to support a suite, then who does the research to find out who does the various elements of it as they come through?" So we're seeing this transition from the legacy players going, now, look, we're the only guys in town to, maybe we're not. Maybe we need to start to playing nice with other people.

Robyn Jacobson:
Alan, you talk of research. This can be incredibly daunting to even know where to start. If you've recognized that you need to update or improve your processes and software environment, where do you begin? How do you know what's suitable for you? How do you know what to trust and how do you know what's going to be the most suitable for your practice?

Alan FitzGerald:
Oh, look, good call. I mean, obviously, we don't endorse or advocate any one particular product and, or solution apart from Alan FitzGerald who's talking right now. Sorry, I've put that plug in. Look, it comes down to, there's a couple of elements. Talk to The Tax Institute.

Alan FitzGerald:
Talk to other associations. There's a series of events coming up. There's ABE. I think you and I are going to be in separate things at ABE in a couple of weeks time. Accountex are launching in 2023. That's from the UK. There's ChangeGPS. There's Zero Forms. There's a lot of fora that are happening at the moment. It's having an inquisitive mind.

Alan FitzGerald:
It's having and taking time, that you sit back and go, "Okay, I'm just going to take a day out or a couple of days out on alternate days or alternate weeks and say, I wonder what is actually out in the marketplace." And it's part about having the what if scenario? And so I used this a lot. I got a recent engagement from a firm that approached me in Sydney a couple of weeks back.

Alan FitzGerald:
And they said, "Oh, we're about to go down the path of seeing what our current vendor offers." And I say, "Okay." I'm going to quote Warren Buffett to you here. Right? One of the world's greatest investors. "Why would you ask your hairdresser if you need a haircut?" Right? Because the answer is, "Yes, we can give you that haircut. There's no need to go anywhere else. We'll just lop off a little bit at the end."

Alan FitzGerald:
And so it's about having and look looking at about what is out from an independence perspective, but also understanding what you want from the firm. Because every firm is in a different stage of their transition. They're either starting out. And I talk to a lot of people who are exiting firms to set up their own organizations or they're looking to hand over a firm or they're somewhere in between.

Alan FitzGerald:
And it depends on where you are in that scheme of things, determines what products are going to be best for you either to position your firm for a sale or position yourself as a startup firm for success into the future. And so I have to say, there is a lot of information out there, that horrible word that we're seeing a lot with relation to COVID, do your own research. Maybe not.

Alan FitzGerald:
But there is certain certainly avenues that you can go down to explore what is actually going to be good for me, and picking up the phone and just ringing people. You'd be surprised what your peers would be able to say. "Hey, what do you think about product X, Y and Z?" They'll tell you a story of why.

Robyn Jacobson:
Alan, the nirvana of having integrated systems and everything works seamlessly. And I'm talking not just across your own practice, but across different government agencies. We've got so many different government agencies to deal with and different regulators.

Robyn Jacobson:
We'll get into more discussion on online services for agents and for businesses shortly, but are the current systems, whether they're provided by the government agencies or their third-party providers, are they meeting the requirements of the sector?

Alan FitzGerald:
Compliance is a funny, funny beast. So if you look through tax, and hey, we're talking with Tax Institute today, let's talk tax. Every tax application, the outputs are not determined by the vendor. They're determined generally by the regulatory authority, in Australia's case it's the ATO. How the various vendors get that output, which in theory should be the exact same, varies from vendor to vendor. Right?

Alan FitzGerald:
So as part of that process, its ability in turn to then play nice, I'll use that expression again, with other applications become a determining factor. And so you can have a very low cost compliant application, which doesn't necessarily talk to other components because they're selling it at a low price in order to get a market share.

Alan FitzGerald:
Or you can have an expensive solution which talks to a lot of things and nice with a whole variety of vendors. And that comes back to my point earlier about your appetite for risk and how deep your pockets are. And so this is where the interactions between, arguments say, what's provided from the regulatory authorities.

Alan FitzGerald:
So you can go onto ASIC Connect, for example, and then set up a company. Or you can go through things like BGL or NowInfinity or a host of other applications to do it. And so there's a couple of methodologies that you can employ. And so what I see when I talk to the bookkeepers, the smaller accounting firms, they're quite happy because they've only got a handful of clients. They're happy to go through ASIC Connect.

Alan FitzGerald:
Once you start getting into the director's identity numbers, you got multiple clients and blah, blah, blah, then you have to have a solution. And then it comes down to, well, how do these solutions talk to my main database? How do they then work with other solutions that I've got in my kit bag that will then, as I build up a piece and I look at that landscape of the solutions that I use in my firm, do they all talk to one another?

Alan FitzGerald:
And if I use that one, what are the opportunities for me to use another solution that sits off to the side? Do those guys talk well to each other? And so there's a lot of things that you'd have to sit back and go, what does my landscape look like and how much does it actually interact with each other? And I think it's one thing to listen to a vendor, to say that.

Alan FitzGerald:
When you're talking, arguments say, a tax vendor talking about practice management, talking about accounting, talking through to corporate compliance and self-managed superannuation, so forth, they have to be... I'm fortunate I have that 30,000 foot view. So I get to see and I go, "Oh look, those bids work really well with each other."

Alan FitzGerald:
But sometimes the vendors will just, and it's understandable, they want to sell you their product. And so it's like, now you're a prospect, Robyn. So we're going to tell you it does everything. And then when you switch it on, it's like, "Oh yeah, that bit, that's coming in the next release." And so suddenly you've become a customer.

Alan FitzGerald:
And so it's that balancing act between being a prospect and being a customer. And I think that's where finding out where these things actually sit, and I'm not an advocate of integrators selling their preferred tech stacks. So people might see these on forums where they talk about this is our preferred tech stack. That's great, because it suits that particular vendor to support that particular tech stack.

Alan FitzGerald:
It's easy for them to support. Or if it's an accounting firm, this is my tech stack. That's great. That works for them. It may not necessarily work for you. And so that's where you have to sit back and actually take this 30,000 foot view and simply ask questions. People are more than happy to answer questions.

Robyn Jacobson:
Let's drill down now into some more tech specific type tools that are available to the market. What are you seeing out there that people may not be aware of?

Alan FitzGerald:
I think people underestimate, especially the newer solutions. And when I say newer, I'm referring to ones that are more in the cloud than the traditional. So if I talk from an accounting firm perspective, because if you think of probably the most comprehensive tax solution out in the marketplace is MYOB's AE tax, right? That stems from the late 1980s. Now, that's had a complete rewrite and it's progressively going up into the cloud.

Alan FitzGerald:
So what people are using on AE today is not what they're going to get when they move on to the cloud solution. Now, that's the same when you move from a client server and you move it into the cloud, there's elements that you get a positive element in some aspects. But also, you don't get the same functionalities it used to have in the past. And that functionality has only evolved over time.

Alan FitzGerald:
Now, what I tell my clients is that whenever this has scenario in any kind of work situation or a life situation, the first statement that comes at is, "Okay, let's just get back to basics here. Let's get back to what we actually need." Instead of being something like, "Let's get back to complexity." Nobody ever says, let's get back to complexity.

Alan FitzGerald:
And so what's happened with some of these solutions is that over time they've just created more, more fluff within them to justify the monthly maintenance fee that the various vendors charge for this, right? Whereas the new software vendors like your Logic, your Zero, your TaxLab, to a great extent, they have basically said, well, what do people actually need?

Alan FitzGerald:
So the ATO says, we need these forms. We need individuals, companies trust, blah, blah. What we need within there. And so the guys then have gone into those and said, "Well, what are the forms that are most popular within the tax returns?" So they've gone, "Well, let's put those forms in." So that's going to cater 80, 90% of what the market needs.

Alan FitzGerald:
And it's those 10% outliers that might need to do stuff in either externally in Excel or might need to look at another application. And when I talk on that scenario, that might be the larger organizations might need to do consolidations or they might need to do a caning calculations. You're not going to get that in an APS, an MYOB or a Zero, right.

Alan FitzGerald:
You're just simply not going to get it. You have to then go into the next echelon of tax return software, which is your TaxLabs, your Wolters Kluwer Integrator, Thomson Reuters ONESOURCE, that's where you start getting into that realm. And so then it comes up, okay, well, I've just jointed tech stack here.

Alan FitzGerald:
So I've got a tax returns for 80%. And then I've got a different version of tax app here for the other guys. There's one vendor. And I do wear a small hat, which is the Xero which will do everything from the individual through to those consolidations.

Alan FitzGerald:
We're seeing a consolidation, no pun intended, a consolidation of what the tax return capabilities are and then the functionalities that exist within there. But it shouldn't be a shock and don't let it be a shock if you move from a 30 year old, 20 year old piece of software to a cloud environment software which is at best, six, maybe seven years old.

Alan FitzGerald:
Don't be surprised if it doesn't get the same functionality, but be surprised as to what you'll actually get out of that particular piece of software. Because for most firms that I deal with, and I've moved from very large firms onto what ostensibly is quite basic tax return softwares. We've gone, we didn't notice anything different.

Alan FitzGerald:
We were told to be scared and to be wary and not to do it by the incumbent vendor, naturally, because they don't want to lose no client. But when we actually dipped our toe in the water, we didn't actually notice a difference. And they can get access to the information that they previously hadn't had access to.

Robyn Jacobson:
Alan, there's such a range of needs of firms. It's not just tax return preparation software, we've of course got practice manage, the time sheets, self-managed superannuation funds and all the requirements that are associated with that including all the investment strategies and member statements, et cetera. We've got all the corporations act requirements.

Robyn Jacobson:
And then you think we've got FBT returns, we've got payroll software that some firms are still very much involved with on behalf of their clients. There is so much to manage. And then I'm thinking further ahead, we've got client verification requirements that are being implemented, and there'll be more information on that coming shortly. So again, try to juggle all the needs of a practice where tax return software is really just a very, although important, but a very small part of all the requirements of the firm.

Alan FitzGerald:
Oh, look, if you think of, and I talk about this, about arguments say, I do talk about this, but the practice management in particular is that the very popular practice management suites that are in the marketplace at the moment that have been around for the last, in essence, 20 years, were designed for 20 years ago.

Alan FitzGerald:
I've done a number of keynote speeches where I talk about practice management is for billing a client, whereas CRM is more for knowing a client. Now, what I mean by that is that the rise of the multidisciplinary firms, and you gave a great example of that with self-managed superannuation and wealth management and all the associated things.

Alan FitzGerald:
They're not suited to be run a practice management system because it's only giving components of how much they built last year, what their current whip is, et cetera, et cetera. They're not actually telling you, when I look at that client, how much is that client worth to me at a single view across my database. And so a client relationship management system will give you that.

Alan FitzGerald:
And this is the fundamental change. So every organization that deals with a client, so I'm talking about, or every vendor that deals too with an accounting firm is using a client relationship management system. So everyone is using a client management system. Yet, what are they selling the accounting firm, we're selling them a practice management system.

Alan FitzGerald:
Well, I want to say, that doesn't make any sense. You're using tools to sell to me a tool that I should be using when I'm talking to my clients, but I'm not. You're selling me something different. And I think it's that, because the nature of the interaction with the clients, so the end clients, so the actual client of the accounting firm, it's a different relationship to what has happened over the last 20 years.

Alan FitzGerald:
To your point, GST came in, the rise of clients using their own GL systems, receipt captures, automated systems, so forth. Well, hey, the practice management systems were designed before GST came into play and they haven't really evolved since then. So you're using a system, it's kind of a square peg in a round hole.

Alan FitzGerald:
You're using a system that was designed for a particular function back then, but nowadays we're actually offering more services and more capabilities to our clients, but the systems aren't adapting. And I think that's one of the key things that is happening in the marketplace at the moment.

Robyn Jacobson:
You speak of evolution, let's look to the future.

Alan FitzGerald:
Yup.

Robyn Jacobson:
Artificial intelligence, robotics, big data. What's ahead for the profession or what does even some of this mean? There'll be some of our listeners who are yet to fully understand what is AI and how does it work in the real world> can you unpack some of this for us?

Alan FitzGerald:
Yeah. Sure. Absolutely. Love it. Oh, love this stuff. Love this stuff. Okay. So robotics, robotics is basically automating processes. Yeah. And linking pieces of software and automating a process that happens within there, rather than having human do that particular process. There's two ways you can look at this. One is you're taking the robot out of the human, which is, at least I'll be freeing up their time.

Alan FitzGerald:
And the other element is, don't automate a bad process. Because if you automate a bad process, you're just speeding up a bad process. Now, that goes back to my original point where a lot of firms are in this scenario at the moment because they're constrained by the capabilities of the systems that they're using. Right?

Alan FitzGerald:
So if you just all automate a bad process because of the limitations of that software, great, you're making it faster. But what are you doing? You're fundamentally automating a bad process. So what robotics do is basically they learn by Roch. So you basically say... So a great example is you're out of office reminder on email. In essence, that's a really robot.

Alan FitzGerald:
You're basically saying, I'm not in the office between these days. As soon as the expiry date finishes, I don't have to go back in and change the out of office reminder. Right. So that's a very simple one, message comes in, bang, a reply message goes out. Machine learning then basically says, "Oh, Robyn seems to take every Tuesday, Wednesdays and Thursdays off." Right. I know you don't.

Robyn Jacobson:
I wish.

Alan FitzGerald:
But it's like, "Oh, okay, well, that seems to be a bit of a trend." And the software will learn. So if you think of looking at Netflix or listening to Spotify, so it is listening or watching or recording what you're watching. So if you're into, I don't know, sci-fi adventure. It's saying, "Hey, you might like some of these ideas."

Alan FitzGerald:
So that's a mixture of machine learning and artificial intelligence because it's picking up on, Robyn's always looking at Star Wars movies. So she might be interested in Star Trek. Now, I know that two of them are an affirmate to each other in some instances, but it's basically, here's some suggestions and some stuff that you might want to do.

Alan FitzGerald:
So it's actually picking up on a trend that you're learning on. So when we utilize that in a tax and finance scenario, it's basically saying I can look at it, rather than looking at a handful of transactions, I can look at all of the transactions. And I can identify within, or the system can identify, actually based on what Robyn has said previously, that seems to be, to me, the computer, that seems to be bit of an error in transaction.

Alan FitzGerald:
Let me just grab that. And I'll just flag it to Robyn and saying, "Hey, I found one. You might want to take a look at this. I'm not saying it's right or it's wrong. I'm just bringing it to your attention." And that's where this rise of AI will come in there. So you could view AI rather, than being artificial, you could view it as more of an assisted intelligence. So it's not going to replace anything.

Alan FitzGerald:
And this is one of the lines that I use in my, and every tax person will appreciate this, is that, up until a point that robotics, artificial intelligence, machine learning, all of these things can actually clarify what a client wants, you're all safe. Right? Because you know, Robyn, I talk about tax advisors and financial advisors being the anxiety transfer specialist. Right? Because you guys speak a very special language.

Alan FitzGerald:
That's the language between the general ledger and the ATO or any kind of regulatory authority. And that's why people come to accounting careers, because they don't want to learn that language. They simply don't want to learn it. They want someone to be that translator that can also keep them compliant and think. And that's where I think is the unharnessed awareness from a tax and financing perspective that needs to be brought forward.

Alan FitzGerald:
So these are just simply, AI, robotics, it's just an evolutionary tool. They're in tools that used day in day out. Google Maps. That's why Google Maps puts all these different alternative routes to take you from destination A to B. It's also why Google Maps often sends you down those errands lane wise, why am I being pointed down this way?

Alan FitzGerald:
Because it's trying to learn, is this a faster way at this time of day to send people rather than the way that they would normally associate with that direction? So the machine is trying to learn, and that's where the machine learning element comes into play as well. So it's gathering all of this information.

Alan FitzGerald:
And that's where, using Google Maps as an example, if you put on between say Melbourne and Tullamarine Airport, it'll show up in certain areas as red. So its certain stretches. It's pulling information where they can see that the traffic isn't going 100 kilometers an hour, it's going 20. So it's flagging that as red.

Alan FitzGerald:
Because everybody's sitting there going, using Google Maps like, "Why am I slowed down?" And so it's actually learning or picking up all of that information. So my message is, don't be afraid of it. It's not going to replace the jobs. It's actually going to be a tool that will benefit and accentuate some of the stuff that you're already doing.

Robyn Jacobson:
Without suggesting in any way that you're a spokesperson for the ATO, how do you see AI affecting online services for agents, online services for business, practitioner lodgement service, et cetera. So these are basically tools or platforms that the ATO's built. How is this going to be affected by the evolution of robotic and AI, in your view, but [crosstalk 00:30:43] this is all crystal ball gazing?

Alan FitzGerald:
And I don't get paid by the ATO. Look, I did a posting many years ago about the changing of the portals. We had to send some of the portals to the new generation of it. And I used, I'm trying to think, my analogy was space travel and the ATO portal and why they were actually interlinked. And it was the story of Michael Collins. Michael Collins is the guy, when Buzz Aldrin and, oh God, I've even forgotten his name. First man in the moon.

Robyn Jacobson:
Neil Armstrong.

Alan FitzGerald:
Neil Armstrong, thank you very much. Stood on the moon, he was floating around in the capsule going around. And he had time to think, right. He had time to think. He's waiting for the guys down on The Eagle has Landed. And he looked around the capsule and he realized that everything in that capsule was made by the lowest cost vendor. Right.

Alan FitzGerald:
And my point in that article was that the design of the portal that was coming, by the time it was released, would be out of date because the process to get it right was based on the technology that existed at that particular point in time, rather than, and I know it's a chicken and egg scenario, rather than the technology that would exist when it was ultimately released.

Alan FitzGerald:
So the frustrations that people are encountering, this is why people are saying don't switch off the portal because we've just got used to it. It had its foibles. It had its weaknesses. It had all these issues, but it worked. And then they swapped onto something else. And hey, presto, things started going wrong.

Alan FitzGerald:
And it's because you have this lag from the ATOs perspective, whereas the rest of the software that everybody else is using has leapfrogged ahead. And so it's kind of always a generation behind, in order to keep up with it. They are in fact in a no-win situation.

Alan FitzGerald:
So because they can't be so far on the bleeding edge, because the technology hasn't got there in order for them to have something that's going to be stable for the next couple of years after that. So they're anything up to 3, 4, 5 plus years behind.

Robyn Jacobson:
Something that your world and our world has in common, and I'm talking technology and tax, neither of them stands still. We get daily updates. We know the law is constantly changing. We've got decision coming out. The courts, we've got guidance being issued by the ATO on a daily basis.

Robyn Jacobson:
I'm not going to sit here and work out which one changes faster. But certainly, from the perspective of an accounting or law firm, it's incredibly challenging that not only is their technical world changing in terms of tax law, but their technological world is also changing rapidly.

Alan FitzGerald:
Absolutely. Look, the compliance is one of those, particularly tax compliance. And it's probably the main reason that I've hung around in this market for so long is because it changes every year. And that to me is one of the... I did a presentation to about 140 CFOs a couple weeks back.

Alan FitzGerald:
And I said, "Look, if you have kids, nieces, nephews, whomever. You have kids friends, neighbors friends or whatever, and they're interested in doing tax and they're interested in learning something else." I said, "Get them to learn software, because even though it sounds the most bizarre thing, the tax software world is probably one of the most dynamic software platforms around because it changes every year."

Alan FitzGerald:
Yeah. You might say, "Oh yeah, it's percentage here and it's percentage..." No, no, no, no. It is all about, how can we make this stuff more and more efficient? So if you think back to what I mentioned earlier about the 30 year old piece of software and moving it to cloud, and it's like, okay, what do we need?

Alan FitzGerald:
The massive benefits you get in productivity and efficiencies by moving to newer generations, which as I said, the outputs are determined by a third-party. And they all tick the boxes with relation to that. How you get their changes, that is amazing at the moment. It is absolutely amazing. And so when you actually open up your mind to go, "Oh, oh, actually, let's sit back and take a look at this."

Alan FitzGerald:
You suddenly go, "Actually, this is potentially for us a better way of doing things. And that's where it gets really exciting. And so because of the regulatory landscape change is so much. The vendors, in turn, not only are they trying to keep an eye on what the changing goal posts are with relation to the tax technology, but they've got the opportunity on a regular basis to update how you get to that end point.

Alan FitzGerald:
And that invariably means it's the Altius, Citius, Fortius, the Higher, Faster, Stronger, the Olympic ideals. And so it's basically how can we tweak this software in a way that is more efficient to process returns for the accounting firms, which in turn frees up the accounting firm's time to be able to offer additional services and, or go home early.

Alan FitzGerald:
I'm a big effort of the go home early bit. So it's one of those scenarios where these software solutions are becoming so much cleverer. They're not taking anything away from the practitioner, far from it. They're actually basically saying, here's a third arm or [inaudible 00:35:46] operate. That's a really obscure reference for anybody, but [inaudible 00:35:49], here's the second hand to be able to do some of those things that might have taken up more of your time.

Robyn Jacobson:
Final question for you. What is, in your view, the single biggest opportunity for practices with technology?

Alan FitzGerald:
I think it goes back to that CRM component, the client relationship management from an accounting firm particularly, because I think it's, as I say to some of my clients, it's a eureka moment when you discover what you can actually do. I'm not suggesting that people stand up naked in their bathtub or anything.

Alan FitzGerald:
But it's basically, when you realize that you can see all of the information across all of your clients ranked and you can say, well, if I have 2000 clients and I look at that and I see that there's a proportion of them that are, arguments say, doing wealth management or there's a portion that don't have self-managed superannuation.

Alan FitzGerald:
It actually allows you to go, "Oh, okay. Now, which guys do I like working with?" This is really important. This is what CRM does as well. So it gives you the opportunity to go, which organizations that I like dealing with or the individuals that I like dealing with, and how can I best hone my skills?

Alan FitzGerald:
So if I'm a specialist in transfer pricing or if it's a specialist in indirect taxes or self-managed superannuation, let's look at my database and I can basically hone in and manage the opportunities that sit within my database in order for me to either increase my business potential or get rid of the clients that I don't need to deal with anymore.

Alan FitzGerald:
Now, that's something that I see, it's the shedding of clients being a massive thing in the next six to 12 months. Because we've got low unemployment, we've got high rates of people exiting the profession and not coming into the profession. So that whoever's left over is going to be managing a big database and going, "I don't want to have to deal with that person anymore."

Alan FitzGerald:
And so they start working out who their ideal client is going to be. So I'm guessing that there's going to be a lot of change over the next six to 12 months in that space alone, as CRM is going to be able to enable you to analyze that.

Robyn Jacobson:
Thank you so much for your comments. I feel like we could keep talking for many more hours. We haven't even touched the surface of things like Bitcoin and cryptocurrency and they're very much associated conversations, but I thank you for your insights today. It was great chatting with you.

Alan FitzGerald:
Wonderful. Thank you for having me.

Robyn Jacobson:
Thank you for listening to this episode of TaxVibe. I've been chatting with FitzGerald of Practice Connections Advisory. 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 on social media, follow The Tax Institute on LinkedIn, Facebook, Instagram and Twitter.

Robyn Jacobson:
You can join the conversation on our member-only community forum at community.taxinstitute.com.au. Don't miss our inaugural member appreciation week, April 26 to 29. An opportunity to recognize, acknowledge and thank our members for everything they do for the profession and for The Institute.

Robyn Jacobson:
Visit taxinstitute.com.au for more information. Not a member of The Tax Institute, join a collective voice of 15,000 practitioners at the heart of the profession and find out what the best tax professionals have in common. For more information, visit taxinstitute.com.au/membership. You can also contact us by emailing taxvibe@taxinstitute.com.au. We look forward to you joining us next time.

Episode 16 — 2022 in Our Sights

Release date: 10 Feb 2022

In this episode of TaxVibe, Robyn chats with Julie Abdalla, FTI, Tax Counsel at The Tax Institute about what’s in store on the tax front for the year ahead, including:

  • PCG 2021/4
  • Section 100A
  • Division 7A
  • Individual residency
  • Corporate/multinationals (Sharing economy, LPP protocol & more)

Host: Robyn Jacobson, CTA 
Guest: Julie Abdalla, FTI

 

Robyn Jacobson:
Hello and welcome to TaxVibe, a podcast by The Tax Institute. I'm Robyn Jacobson, a 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 that will share valuable and practical insights you may not hear every day. We hope you enjoy this episode of TaxVibe. I'm joined by Julie Abdalla, who is the tax counsel at The Tax Institute. Julie's an experienced tax lawyer and emerging leader. She has practiced in the corporate tax teams of big four and top tier law firms in Sydney and Melbourne. Julie also gained experience across the spectrum of UK taxes while working at an international law firm in London.

Robyn Jacobson:
Julie has a strong passion for tax policy and reform, and the depth of knowledge to advocate for members. She has been recognized among her peers and throughout the profession for her leadership and excellence in tax. Julie holds a Bachelor of Arts and a Juris Doctor from the University of Sydney and a Master of Laws from the university of Melbourne, part of which was completed at the University of Oxford. Julie, welcome to TaxVibe for the very first time and, of course, our first episode for 2022.

Julie Abdalla:
Hi, Robyn. Thank you for having me. It's a pleasure to be here.

Robyn Jacobson:
I wish we could still do this in person at some stage, but for the time being we will still do this remotely, you in Sydney and me in Melbourne.

Julie Abdalla:
I know. It'd be nice to be in the same room, but I suppose that's one of the beauties of technology, that we can actually do this from totally different states.

Robyn Jacobson:
Absolutely. Look, we've already got ourselves one month into the new year. Can't believe it's February already. In terms of the holiday break, how did you chill out? Because, gosh, it was a big year last year. In fact, two big years, but how did you spend time to just recharge and break away from this tax law?

Julie Abdalla:
It was a big year, and you're right, it has been a big couple of years. My break was actually pretty short, but I became a proud auntie for the second time to another little niece so I had a lot of family time with them. I was actually in London when my first niece was born, so it was nice to actually be here this time and not miss out on the early stages where they're changing so much. That's been really fun. Otherwise, I had a pretty quiet break. I spent a lot of time in my garden. I've got this wild, lush garden and the complete introvert in me is speaking now but I really love spending time out there. Got this fish pond and I've managed to keep my fish alive, so very happy with that. What about you? Your break was probably a bit more adventurous than mine.

Robyn Jacobson:
Well, having been locked out of Melbourne for what feels like all of two years, and a few of our members may recall that beginning of 2020 I broke my foot and so I was laid up with a moon boot and keeping my leg elevated. I really feel like lockdowns for me began back in January of 2020, but I was able to do some trips around regional Victoria. One of the things I love doing is getting out in the car and doing road trips and country trips and catching up with friends and family so, look, I feel like I've covered the north of the state up to Yarrawonga and down to Geelong and down the peninsula and through the alpine area of Victoria. It was lovely to get some fresh air, not read tax. It may surprise some people, but yes I can go a couple of weeks without tax. It was lovely to recharge and have some time out.

Julie Abdalla:
When I lived in Melbourne, I used to love doing those regional trips out to different parts of Victoria. It's so beautiful out there. I mean, it's quite different from regional New South Wales but that's also really beautiful. I just love being in the country so I'm happy either way.

Robyn Jacobson:
And it's quite a compact state so with a few hours' drive you can cover a fair bit of it.

Julie Abdalla:
Easy to do, yeah.

Robyn Jacobson:
As we get back into the working year, how do we best pace ourselves? Now, that's you and I and our broader team and, of course, the profession more broadly again. We talk about New Year's resolutions and how quickly they are broken [inaudible 00:04:15] this way of approaching this when we're talking about getting back into the working year and how do you manage it?

Julie Abdalla:
Well, that is the million dollar question isn't it. I think, look, different things work for different people. I think, though, the past couple of years have been relentless and draining, especially in and out of lockdown and having to adapt to different working situations. But for me, I don't actually make any New Year's resolutions. I find that's a very good way to break them very quickly. I do like to set goals and there are things that I want to achieve throughout the year, but try not to put too much pressure on the beginning of the year by calling them resolutions. But it's a bit of balance, and balance isn't even a 50/50 thing. Balance is just what works for you on that day, during that week. It's exercise, it's managing work, it's spending time with my family and my friends in my garden. What about you?

Robyn Jacobson:
Look, I think it is time out. When you're looking at these beautiful long evenings we've got at the moment... I know WA doesn't have daylight savings nor Queensland, but for those states that do we have got these long evenings, and particularly in Melbourne and then more so down in Tasmania. Our highlights are so much longer than the northern states.

Julie Abdalla:
So beautiful.

Robyn Jacobson:
I have been making a point of getting out every evening and having a walk after work, and that's something I would love to maintain right through winter but that's one of those things that you strive to do and may not actually [crosstalk 00:05:41].

Julie Abdalla:
I always do it in the morning. I go out for a morning walk so I get it over and done with for the day, but you're right. It's so important to just take a moment to reset and refresh.

Robyn Jacobson:
So with a better year ahead, let's just flag some key dates coming up. Federal budget. Now, I've always described this as the most exciting date on the accountant's calendar. We're talking typically that second Tuesday in May, and I've already said cancel your social plans and if you're going to spend the evening with anyone else, it's got to be other accountants or lawyers where you order your pizza and have a beer or two and just enjoy the evening. But this year with the federal election having to be held at least in the Senate now, it's unlikely we're going to see two elections, one for the lower house last September. We are talking about, of course, a federal election by the 21st of May. That's brought forward the budget to the 29th of March, which is only a couple of months away. We will keep a very close eye on what is going on with that, but can you make a brief comment about what we've been doing lately? Because pre-budget submissions are an important part of gearing up for the federal budget each year.

Julie Abdalla:
Yeah, that's right. We've just lodged our pre-budget submission and it's something we do pretty much every year, and it's one way that we advocate for what our members and what the community wants and needs from our government in relation to tax and to the system. They're things that we put in there that we want to see in the upcoming budget and, I guess, it's a wait and see on budget night. I've been very privileged to actually attend the budget lock-up, which is where we have a first glimpse of the budget papers and the budget measures before the Treasury gives his speech on budget night. Hopefully we'll have that opportunity again this year. Of course, we'll be providing resources for our members to explain the impact of the budget measures.

Robyn Jacobson:
We're also going to have another disrupted parliamentary year [crosstalk 00:07:33]. In an ordinary parliamentary year, and I'm talking ordinary outside COVID and outside elections and anything else that might be a big disrupter.

Julie Abdalla:
I don't really remember those times.

Robyn Jacobson:
Feels like a few years now. We typically have around 19 or 20 sitting weeks a year, which doesn't sound very many but they need to spend time back in their electorates throughout the year. But with the election having to be held by May, and then of course we've got the caretaker period before that and the election campaigning, I've counted up we're unlikely to see much more than six sitting days before August this year, which might sound quite extraordinary but we've got a few sitting days in February, we've got the three days for the budget then we both are going to go into caretaker mode, the election will be called.

Robyn Jacobson:
I'll be very surprised if there are any sitting days at the end of June. It depends how long they're going to take to count the votes, but I think with COVID we're going to have a much higher proportion of postal votes than we might have seen in years gone by. That always takes longer to count those up and get them in, and then we've got the winter resets so it really could be August, September before we get any meaningful debate before the parliament. What does this mean when we've got such disruption to the legislative program? The business world has to keep on operating.

Julie Abdalla:
Well, that's right. The world keeps spinning, doesn't it? I mean, businesses going on, people are living their lives and we do need a degree of certainty from our taxes, and that's the problem. If we don't have enough time where parliament's sitting, we don't get legislation through, but we need to have some of these new measures coming through, we need debate and people need certainty. We need some degree of certainty from our tax system, and what we've seen in the changing landscape where things are moving pretty quickly all the time is that our system's just not coping.

Robyn Jacobson:
Our members recently will have received a copy of our State of Tax Policy Report which sets out the status of all the tax and superannuation measures that we think are key to our members. It'll be interesting to rerun that report roughly midyear because, of course, we will either have a returning coalition government or a new Labor government. Now, if it's returning coalition you'd expect any lapsed bills before the parliament to simply be reproduced, but they may take it as an opportunity to tweak some of their policies. If it's an incoming Labor government, then we would expect some changes in tax policy but that's all to be revealed. It's going to be in one sense a very disruptive year, but it's also a year of opportunity.

Julie Abdalla:
Absolutely. Absolutely. We have to keep hopeful.

Robyn Jacobson:
What are the key things on our radar at the moment? Now, we've got some things noted down here and we're going to across the SME sector as well as the large corporates, but what would you like to kick off with in terms of what we're keeping an eye on over the months ahead?

Julie Abdalla:
Okay. What about the professional firm's PCG 2021/4? The final version was issued in December last year, and so I think the dust is really still settling on this one. But PCG sets out the ATO's compliance approach to the allocation of profits or income from professional firms to in the assessable income of the practitioners that work in those firms. It does so through two gateways and a risk assessment framework of objective factors which are used to rate arrangements from low, medium or high risk. As we know, PCGs are essentially risk assessment tools. I think people are still really coming to terms with this PCG and what it means for their practices and how it affects business structures and operations. We've had a working group, a committee of our experienced practitioners involved in consultation with the ATO for quite some time now. I'm very conscious that PCG applies from mid this year, from 1st of July 2022, so we're working with our committee during this time to provide resources to educate our members on what they need to consider and what they need to do in light of the PCG.

Robyn Jacobson:
I think what's really important to note, and you made that comment about it being a risk assessment tool. Practical compliance guidelines, or PCGs, are not rulings. They might look like one and sort of have the flavor of one, but they don't explain the Commissioner's interpretation of the law or how the law applies to tax payers. What they do is set out the extent or the risk profile that they're likely to undertake a review or an audit of a taxpayer.

Julie Abdalla:
But it is how they allocate their compliance resources and what the Commissioner will consider as high risk or not, but it isn't a statement of the Commissioner's view of the law and we do need to be mindful of what they mean, how they operate, what reliance can we place on them.

Robyn Jacobson:
Another interesting thing we're keeping a close eye on, and this has been, I've got to say, dragging on for some years now, Section 100A. Anybody who has a trust and has distributions made to a beneficiary where, I'm going to describe it really simply, your cash goes one way and the distribution on paper goes somewhere else. It's a separation of profit and the economic benefit of that distribution. If [inaudible 00:12:33] agreement, you can end up with adverse tax on occasions for the trustee. Now, the ATO has been saying for some time that they would provide some guidance on this and they did delay it from late last year. They said it was ready at the time, but because of the pressure on the profession they said they would delay it until this year. Now, at the moment the ATO website is still indicating that this guidance is expected to be completed in February, but I think what is interesting, and we need to wait and see how this plays out, but there's been a recent Federal Court decision called Guardian.

Robyn Jacobson:
Now, I won't go through the detail of the case, but it is worth a read and we've also included a summary of this in our recent TaxVibe or [inaudible 00:13:11] The Tax Institute. But I think what's really relevant about this case, it is a single judge not three judges, but I would expect it to go on appeal to the full Federal Court. It deals with what is a reimbursement agreement and concludes that there wasn't one. It deals with whether there was an ordinary family or commercial dealing and the judge concluded, Justice Logan, that there in fact was this situation. In other words, they got the benefit of the exemption. And he went on to conclude that part 4A did not apply. To me, this case has everything and you just need to see whether this delays the ATO's guidance because it's hard to see how they could release a draft ruling and a PCG when potentially there's still an appeal still to play out. We'll keep a very close eye on this one.

Julie Abdalla:
Yeah. Look, I think it was a very sensible decision to hold off on releasing the guidance in light of what's going on and the pressure on practitioners. I think it would be difficult to see how finalized guidance would be issued at this stage. We do need to see what happens next.

Robyn Jacobson:
Now, dovetailing very closely with that, Division 7A. Can we ever have a conversation about SMEs and tax and not talk about Division 7A?

Julie Abdalla:
I don't think so. 

Robyn Jacobson:
I'm going to say we're heading into 11, 12 years now since the original review by the Board of Taxation was commissioned by the then Labor assistant treasurer way back in 2012. Now, we are still waiting for the proposed Treasury reforms. We have seen nothing formally from Treasury since 2018 when they released that discussion paper. We know the measures are deferred and they will commence on the first, 1 July following enactment of the enabling legislation. That's open ended. That could be anytime. Could be five, ten years from now, but in the mean time we do know that the ATO is going to be releasing a new package of Div 7A guidance, a new ruling, presumably a new PCG and possibly a new practice statement but that might all be bound up together in the PCG. We'll be very, very keenly following this. It's going to be highly relevant for many of our members and the broader profession, those that have, of course, trusts, private companies, et cetera so we'll keep a close eye on this one.

Julie Abdalla:
Absolutely. The guidance that the ATO's looking to release, that's quite distinct from the Treasury reforms, though, those reforms.

Robyn Jacobson:
Yes, it is. I think that's a really important point because people may get the two confused or even conflate them. Treasury putting forward a bill to parliament that amends the legislation is quite different from the ATO providing guidance on how to interpret the law, or indeed how they might approach risk reviews. So yes, this is distinct and, again, will be interesting to see what does it do, how does it rewrite the existing rulings. I'm referring to 2010/3 and PSOA 2010 form documents like that, which are then around for more than 10 years now. Maybe it's time to update them, but how does that sit in the context of the proposed reforms? It's really interesting to watch. So next issue, individual residency. We are still waiting and waiting and waiting.

Julie Abdalla:
We are waiting and waiting. As you know, last year there were those changes that were announced to the individual tax residency rules in the federal budget. The new framework is based on the recommendations made by the Board of Tax in its 2019 report. Essentially, it's proposed to consist of a primary bright-line test based on visible presence and then you've got a secondary test based on certain objective factors. I don't think we have time to get into the detail of all the challenges right now, but certainly with the Addy case and the ATO's recent decision impact statement there's a lot going on in the individual tax residency space and likely to be a significant overhaul of the rules. We haven't seen the draft legislation yet, but I think we'd anticipate there will be some consultation at that time.

Robyn Jacobson:
Is it too simplistic to boil it down to one core concern, and that is are we at risk of replacing one set of complex rules that require interpretation and possibly judicial guidance with another set of complex rules that require interpretation? Isn't that a significant risk here?

Julie Abdalla:
No, I think you're absolutely right. If you think about the litigation of these kind of matters over the past few years and when they changed the rules earlier, exactly as you say, replacing complex rules with more complex rules. But I don't know that that's the answer.

Robyn Jacobson:
The date was 1 July 2009, that's when they changed or narrowed particularly the exemption 23AG. Since that time, we've had a whole bundle of taxpayers trying to argue that they in fact are non-residents because that way, the incumbent would otherwise be assessable in Australia, could be exempt, and most of them have been unsuccessful. Onto the corporates and the multinationals. What do you see as, I guess, the top priorities or the key areas that we are keeping a very close eye on?

Julie Abdalla:
Well, sticking to the theme of residency, corporate tax residency is another to keep an eye on. In the 2021/22 federal budget, the government announced technology amendments to clarify the corporate residency test and those amendments would basically provide that a company that's incorporated offshore is treated as an Australian tax resident if it has a significant economic connection to Australia. Those changes have been really welcomed. Last year, a further announcement was made by the government that they would consult on extending the rules to trusts and CLPs, so corporate limited partnerships. Consultation hasn't taken place yet and it's been delayed a number of times, presumably due to other priorities, but we anticipate it'll commence in the coming months. That's one area to keep an eye on.

Julie Abdalla:
Pillar One and Pillar Two... Now, of course, we don't have time to get into the detail here, but at a very, very high level we've got Pillar One, which is about ensuring profits are allocated more appropriately, Pillar Two which is essentially implementing a global minimum corporate tax rate. There have been ongoing negotiations for quite some time, which are expected to progress throughout the year. I think it goes without saying that it's an ambitious timeframe for go live, if you will. It's really interesting to see the interaction between tax and accounting and the administrative aspects as well. I know Treasury and the ATO are working really closely together. It's also interesting to think about the policy designs going on, so that's a watch and see over the next 12 months, I think.

Robyn Jacobson:
What's happening with the sharing economy? Because we've seen a lot of noise and activity in relation to Airbnb and Uber and the like, but we're getting a new legislative framework that's going to allow more data sharing with the ATO.

Julie Abdalla:
Yes. Well, we think so, depending on how the parliamentary sittings go. This measure... You're right, it does have its roots in the efforts of the shadow economy taskforce recommendation. Last year, we actually appeared before the Senate Economics Legislation Committee inquiry into the bill and we've been keenly tracking its progress. The proposed start date for taxi travel and short term accommodation is 1 July of this year, and for pretty much every thing else that's captured is 1 July next year. The bill hasn't been passed though, so potentially in the upcoming parliamentary sitting this month but we don't know. We do understand the ATO will be consulting on administrative issues with the implementation of the regime, including the need for public advice and guidance and, of course, reporting requirements so watch this space.

Robyn Jacobson:
Few things to keep an eye on there. Legal professional privilege pressure cult. Try and say that quickly three times.

Julie Abdalla:
It's a tongue twister, but it's a very important fundamental concept, the LPP... Well, it's a fundamental right of all clients, and including taxpayers who seek legal advice. What the protocol attempts to do is document the ATO's view of what is best practice when making claims of LPP in response to formal information gathering notices from the ATO. There has been ongoing consultation with the ATO and certain groups, including The Tax Institute, and I know that the protocol has evolved over time due to that consultation, which is great to see. The ATO website at the moment is telling us that further consultation may take place, but expected completion is in March, so next month. So it remains to be seen whether it will change again since feedback was provided late last year or if that's it.

Robyn Jacobson:
One final measure in the corporate space, what is known as CCIV, corporate collective investment vehicles.

Julie Abdalla:
We do like a little bit of a tongue twister in the corporate space. Yeah, so the bill was introduced into the House of Reps in late November. It won't be debated until parliament resumes this year so, again, potentially in this February sitting, but it has been referred to the Senate Economics Legislation Committee and they will be reporting on it early this month. The main purpose of the bill is to create a new class of companies, so CCIVs, that any investors in which will be taxed on a flow through basis. At a very high level, it piggybacks off the AMIT rules, the existing attribution managed investment trust rules, but if the CCIV doesn't fall within those rules then its shareholders may be taxed under Div 6 or Div 6C.

Robyn Jacobson:
So, effectively, we're trying to attract foreign investment here.

Julie Abdalla:
That's right, we are trying to encourage foreign investment and it does have the benefit of relating back to the AMIT rules as well, which is something we're a bit more familiar with over the past few years since they've been around. It's actually been a long time coming. The new regime start date is 1 July this year, but the intention to create it was actually first announced in the 2016, 2017 federal budget. It'll be interesting to see how this progresses following standard inquiry as well.

Robyn Jacobson:
It will. When I hear you talk about AMIT and CCIV, it just makes me wonder if the government and the ATO have run out of three letter acronyms so they're having to move into four letter acronyms.

Julie Abdalla:
Well, let's hope we don't move to five any time soon.

Robyn Jacobson:
Creating new words by then. Here's another four letter one, IGTO. IGOT depending how you express it, but the Inspector-General of Taxation and Taxation Ombudsman is currently undertaking three reviews. Now, the office of the Inspector-General always has a web program available on their website setting out the work that they're doing, but what are these three particular investigations about?

Julie Abdalla:
This first one's about the ATO's administration and management of objections, second one's the exercise of the general powers of administration and the last one's about the exercise of the commissioner's remedial power. They're really interesting topics. We've been doing some work in the background on these issues and we've been engaging with the Inspector-General. It's always interesting for me to see how things are done in other jurisdictions as well to compare... Sometimes we can learn things from what other countries do, something that we should be doing or actually what not to do. And we'll be making three submissions in response to those reviews.

Robyn Jacobson:
Another issue we're looking at is the... Here we've got another four letter acronym, the ANAO, which is the Australian National Audit Office. Now, many of our listeners may not be aware that the role of the Australian National Audit Office is in fact to audit the government and government departments. They're currently conducting an audit of the ATO's engagement with tax agents. I have already mentioned on behalf of The Tax Institute with the ANAO we've had some initial meetings to talk about the scope of their audit and feedback that they're seeking. We have put a call out to our members saying, "If you've got any feedback on this, please let us know." They are calling for feedback right through til April, but we will continue to be meeting with them between now and then.

Robyn Jacobson:
This is a formal audit that gets sent in draft to the ATO, and then it will be actually formally tabled before the parliament, expected in August. It will interesting to see not just what the recommendations of the ANAO are, but what might come out of any reforms so changes could be made down the track to these processes. Another issue we're looking at, there is a current working group set up by the ATO called the Lodgment Program Review Working Group. Again, I am the Institute's representative in this working group and we are meeting with other professional bodies and some practitioners and the ATO and looking at the whole scope of everything that has to be lodged, the timing, all the different lodgment requirements.

Robyn Jacobson:
I think back 20 or 30 years ago where it had these lovely quiet periods in between lodgment season. Yes, [inaudible 00:26:10] April, May. Yes, you have a flurry of activity in June, your lodgments began July, business lodgments you typically have another rush before Christmas and maybe another one in May. With activity statements and TBARs and TPARs and, of course, tax returns and SG statements, there are so much now. It just seems to be a rolling cycle of lodgment obligations.

Julie Abdalla:
Practitioners certainly have their work cut out for them, and actually so does this working group.

Robyn Jacobson:
Absolutely. Once again, we're seeking feedback from members and we're keen to hear your thoughts and your experiences and what can be done to improve the current lodgment program. The last comment I wanted to make was in relation to the COVID business support. We had almost thought that we might be coming out the tail end of all these different programs and the vaccine level's so high, and yes Omicron is widespread and case numbers are up but its severity does not seem to be quite as bad as Delta and the previous variants. But that said, there is a hesitancy by consumers to go out in retail settings. We're certainly seeing an enormous staffing shortage where almost every business you have some sort of dealing with now, they're short staffed.

Robyn Jacobson:
The service is limited, it's taking longer to do everything and not just truck drivers, but shop assistants and hairdressers and all sorts of things. On the 30th of January, the New South Wales government announced another round of business support. Now, it would be a mistake to call this JobSaver 2 or JobSaver 2022. It is called the Small Business Support Program and what we know to date is that there will be a one off payment in February based on a decline in turnover of at least 40%. Now, the specific parameters and the features of the program we will be sharing in social media as well as in vlogs with our members but, of course, if you want the initial detail you can find that at the New South Wales Premier's media release webpage.

Robyn Jacobson:
Hopefully we don't have to continue to rely on government support to get through the remainder of the pandemic, but I think it would be unrealistic to think that we're not going to see further outbreaks. What we may well see is targeted or localized support rather than a universal program being rolled out like JobKeeper, or JobSaver in the case of New South Wales. More detail to come on this program. Obviously applications still need to open up and all the fine print needs to be worked through, but I'd like to think that we won't see too many more of these in the next year, but I hope I'm not proven wrong.

Julie Abdalla:
Fingers crossed. I mean, it is great to see the government still providing some level of support while I know there's a lot of effort to go back to normal, whatever normal is, and living with COVID, but we do have to acknowledge businesses are still struggling and people are still struggling through so it's great to see that support coming through.

Robyn Jacobson:
And not wanting to overlook members or practitioners or businesses outside New South Wales, do keep a close eye on your particular state or territory because, for example, I saw last week South Australian government has announced further support. I'd expect there might be something further from Victorian government, and with case numbers as broad as they are and businesses continue to be affected it is important that you do check your local state government websites to see what support is available to you or your client's businesses. Julie, as we wrap, big year ahead, lots of things in store, but there's that certain optimism and hope every January, February as we embark on a brand new year and we don't know what's in store.

Julie Abdalla:
Always. I mean, we do have to keep that hope alive throughout the year, but yeah, absolutely, it's going to be a big year. Very much looking forward to it.

Robyn Jacobson:
And I look forward to working with you and the rest of our tax policy advocacy team.

Julie Abdalla:
Yeah, likewise. Hopefully, we'll get you up to Sydney more often this year.

Robyn Jacobson:
Well, I hope so. I want to stand in front of a live audience, so I do look forward to that. No, thank you so much for your time, Julie.

Julie Abdalla:
Thank you for having me on the podcast.

Robyn Jacobson:
We'll get you back again this year, so don't think this is your last appearance.

Julie Abdalla:
Thank you.

Robyn Jacobson:
Thank you for listening to this episode of TaxVibe. I've been chatting with Julie Abdalla, FTI, tax counsel at The Tax Institute. 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 on social media, follow The Tax Institute on LinkedIn, Facebook, Instagram and Twitter. You can join the conversation on our member only community forum at community.taxinstitute.com.au. Not a member of The Tax Institute? Join a collective voice of 15,000 practitioners at the heart of the profession and find out what the best tax professionals have in common. Join before 28th February 2022 and save 50% on membership. For more information, visit taxinstitute.com.au/membership. You can also contact us by emailing taxvibe@taxinstitute.com.au. We look forward to you joining us next time.  Robyn Jacobson:

Episode 15 — Taking a wellness break and 2022 vision

Release date: 14 Dec 2021

In this episode, host and Senior Advocate, Robyn Jacobson, CTA chats with Jerome Tse, CTA, Partner at King & Wood Mallesons and Marg Marshall, CTA, Partner at WLF Accounting & Advisory about the importance of looking after yourself and what’s in store for 2022, including:

  • Health and Wellness
  • What’s in our sights
  • Vision for 2022

Host: Robyn Jacobson, CTA, The Tax Institute 

Guests: Jerome Tse, CTA, Partner at King & Wood Mallesons and Marg Marshall, CTA, Partner at WLF Accounting & Advisory

 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 professions, 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'm joined by Jerome TaxVibe, CTA who is a partner at King & Wood Mallesons in Sydney, specializing in taxation disputes and litigation. Jerome is also the firm's global transfer pricing coordinator. Jerome is an experienced tax practitioner and has been involved in a number of Australia's recent high profile tax cases. Jerome is a National Counselor of The Tax Institute, has been the 2021 Vice President and will be our President for 2022.

 

Robyn Jacobson:

I'm also joined by Marg Marshall, CTA who is a partner at WLF Accounting and Advisory in Hobart. Marg has built a reputation as one of Australia's foremost experts in specialist taxation. She is regularly engaged to present local and national conferences and seminars. Her professional commentary is also in demand for media. And as a panelist speaker, Marg has over 25 years experience in chartered accounting firms, Marg has been the Tasmanian National Counselor since 2016 and a State Counselor for Tasmania since 2013, she'll be the Vice President of The Tax Institute for 2022. Jerome and Marg, welcome to Tax Vibe for this final episode for 2021. And congratulations on your appointments for next year.

 

Jerome Tse:

Thanks Robyn. Very excited for 2022, very excited for 2021 to end too.

 

Marg Marshall:

Oh yes, absolutely. Yes.

 

Robyn Jacobson:

We talk about the light at the end of the tunnel finally, and we hope that this indeed is the light at the end of the tunnel and not another oncoming train like the Delta Variant was this year. So Marg, just to quickly kick off, the professions pretty exhausted, isn't it?

 

Marg Marshall:

You're right. Robyn, everyone really needs a break. People have worked very very hard over the last 18 months to two years and not many did take a break last year, I know that. So we are seeing a lot of fatigue amongst our members and we are really strongly encouraging people to try and take that break. In fact, not just try, actually book it in and do it-

 

Robyn Jacobson:

And leave the laptops at the office.

 

Marg Marshall:

Yeah. Leave your laptop at the office, if you are working in the office of course. That's one of the problems I suppose, with this year is so many people still working from home, that separation of work and fun, those lines are very blurred. So shut it, close it, put it in its bag, put it in a cupboard. So you can't even see it.

 

Robyn Jacobson:

Don't be tempted.

 

Marg Marshall:

Yeah.

 

Robyn Jacobson:

Jerome, the Tax institute's going to be launching a new campaign called Out of Office, and we're going to be running this over the next few weeks. And it's really an opportunity to our members and the wider tax community to take that willing break so people can focus on life outside of work over the holiday period. We can talk in cliches about swapping suits for sandals and Zoom for [zeeds 00:03:33] and emails for easy breezy days. But Jerome in all seriousness, how, do we ensure that people do take the break that is so deserved and needed this Summer?

 

Jerome Tse:

That's hard though to, especially because we can't travel and we might get to that down the track in this podcast. I'm seeing a lot of our staff accumulate annual leave and that's not great for us. And the cynics might say, as an owner of a business, you're just trying to reduce your a liability, but in all seriousness, that is there for you to rest and recuperate. It's not there for you to, I mean, ideally, if you've got an eight week European holiday book, that's great, but we've had a two year stint in Australia where we can't really go anywhere. We really need to take this January, take the leave and rest. January, I guess, for a litigator like me is probably the ideal time because the courts are closed. The barristers are all on holidays and I've encouraged my teams to take January off.

 

Jerome Tse:

It's one of the few months of the year or few weeks of the year that you can. And indeed the holiday period, between the end of December and January, no client's going to be calling you. So as Marg said, take, put your laptop away. When I go overseas for a longer break, I usually turn my work emails off in iPhone. So I'll keep my home emails on. I'll keep my messages on, but I'm one of those people who have [Ad 00:04:57] so there's one on there, I need to read it. So if I turn it off, I don't see that there's an email outstanding and I'll turn it on at the end of the day. But please do take a break. I've been telling my team to take a break. And I tell all our members and our listeners, you deserve a break.

 

Marg Marshall:

And it's Important to have that self-awareness or however you want to express that emotional awareness that sometimes we get so caught up in the busyness and the deadlines and the adrenaline that sometimes it can be difficult to stand back and recognize that you indeed do need a mental break.

 

Jerome Tse:

That's right. Unfortunately, alcohol... I'm Probably one of these people, alcohol probably doesn't help you sleep. Right? So maybe sometimes just go lighter on the alcohol. You get a better sleep for it. I mean, I usually try and do [Feet Fast 00:05:45] or [Dry July 00:05:46]. I'm not plugging either of those charities, but they're good for You.

 

Robyn Jacobson:

I've got friends who are drinking 0% alcohol. Now I'm not here to plug that either. But it is something that's becoming more socially acceptable and you get none of the downsides of having an afternoon on the beers that does contain alcohol.

 

Jerome Tse:

Yep. And that's certainly something I'm starting to do more and more. And you know, they look like real beers. I've had bad, not alcohol free Gin. I haven't found a good one at those yet.

 

Marg Marshall:

I've got a recommendation for you.

 

Jerome Tse:

Probably a Tassie one. Hey Marg.

 

Marg Marshall:

Yeah, definitely a Tassie one. There's some good ones out there you do, but you'd have to find them, but you're absolutely right. The whole alcohol thing can be... it's a time when we do have lots of opportunities to drink. There's always been in the past a bit of an expectation, but I'm seeing the same thing amongst my friends and peers, people making choices about how much or what they're going to drink and making those healthy choices and absolutely right. I sleep much better if I haven't had a skin form before I go to bed. So yeah,

 

Robyn Jacobson:

We recently went to both a brewery and a winery and managed to get through most of it without any alcohol. It's, it's quite amazing. Jerome, we look at the year, in fact, the two years that we've had, but particularly the last 12 months, which we didn't see coming, and we can say the same thing about 2020, but we got to the end of 20 and really thought we'd done the hard yards and 21 was going to be very different. And, and so for many people, this was actually a harder year than 2020. And of course, New South Wales had the extended lockdown really for the first time in the pandemic, to the extent it did. So, how do you avoid burnout? And, and when you find yourself depleted, how do you perhaps in a normal environment, if I could still refer to normality and perhaps how has it been affected by the past couple of years?

 

Jerome Tse:

Usually what I like doing, I'm not as active as my doctors tell me, I need to be, what I usually do is, go... I like holidays, I like going to new places, whether it's domestic or overseas, unfortunate enough or unfortunate enough to go overseas for work for a bit. So, usually take on a weekend here or there just to find a new place. And that's been hard obviously, because we haven't been allowed to travel. So I don't think I've switched off as well as some other people who might be able to, do laps of Bondi Beach, and go up and down swimming. So it's been hard for me and I think people have to not be afraid of saying it's been hard, because people will help, but I'm hoping, next year, subject to Omicron that will stop and we can go and do things again. I have to preach what I tell my teams. I need to recharge in January too.

 

Robyn Jacobson:

Marg, How do you work out the best way to break away from all the hecticness of the day?

 

Marg Marshall:

Well, Robyn of course, being in Tassie much more fortunate than the rest of the country in terms of haven't had a lockdown since that very first one that the whole country went into, apart from a very short three day one, and generally, able to do most things. My personal thing is Green time, I'm a big believer in Green time, getting out, having a bush walk, even locally here in Hobart. And it's the same in most cities, there are parks and trees are really important for that. If you can get in amongst some trees, whether it's half an hour or an all day walk, I find that's very... it's calming, and it just resets your mind. And I've been on this one, my personal trainer runs Friday afternoon walks or Friday night walks and that's Winter and Summer. So down here in Summer, of course we get the very long evenings and that's fabulous.

 

Marg Marshall:

But in Winter, the walking in the dark, is a lovely thing to do as well. And we take really easy parts and those sorts of things and it's really local and it's only an hour and a half. It's a Friday night thing and it really puts a great full stop on the week. They're becoming more popular, more people doing them. And so, I would encourage everyone to and get some Green time if you can. I know it's not everybody's cup of tea. And a lot of people aren't that active, but you know, a half hour stroll through a park even can be enough really.

 

Robyn Jacobson:

Thinking of the contrast. So, let's work on the basis. You've spent the whole week in your office. You've been sitting at your desk, you've been sedentary and the mind's been incredibly active and working hard, and then you've switched them around. So when you're going for your walk on the Friday afternoon, closes off the week, you're now physically active and the mind is switched gear completely.

 

Marg Marshall:

Yep. It is amazing. And it is really, really good for wellbeing. I find it's great for my wellbeing and I've noticed because I haven't been able to go for the last few weeks and now the season's finished and everyone's busy doing Christmas things. I can see a difference in me just from not having done it. So I know what it does for me. Green time, really important.

 

Robyn Jacobson:

Maybe it's because I'm a Piscean, but I've always found that water is calming. So whether it's a beach, an ocean, a lake, a river, I find if I can be near water and watch the floods, it's a bit like watching the embers in a fireplace, watching the flow of water, I find incredibly calming. So let's change gear in our conversation. We're closing off 2021 move. We're moving into 2022. We know it's got to be a federal election year. We have this wonder full system in Australia where we're still going to have speculation for many months as to when the election will be held. But we know it's got to be held on the basis. There is one election next year, not two because they technically could run the half Senate plus the full Lower House, but they're going to run one general election. It would need to be by the 21st of May. We now know that the parliamentary sittings they've scheduled 29 March for the federal budget. So that would suggest an election sometime in early to mid-May. So, there's an imperative to keep tax reform on the radar here, but what are some of the key issues that we'd like to keep on our tax radar? And Jerome, I'll kickoff with you, in corporate land? What are the key tax issues on your radar?

 

Jerome Tse:

I think industrial matters are going to come to the forefront. There's been a lot of pressure on staffing, not enough employees, in restaurants and so on in accounting and IT and so on. So I think industrial issues pertaining to tax and super will come to the forefront, particularly contractor, employee issues. You've seen the on call payroll tax matter and that's spreading to New South Wales and other states and territories as well. So, I think those things are important to keep an eye out on. Internationally transfer pricing, I think continues to rear its ugly head, financing issues, commodities, IP, and then IP generally, you've got two products coming out from the ATO next year, got the current draft software ruling and also the intangibles BCG. So, they will impact corporate tax payers if not mid-market as well. And finally, I think Crypto finally, Crypto is coming to the forefront for good or bad-

 

Robyn Jacobson:

And in the corporate world,

 

Jerome Tse:

Well, in the corporate world, you're looking at exchanges and financing and blockchain issues. So maybe not Crypto particularly, but blockchain and technology. There are some really interesting developments coming out. CBA's released its Crypto App in the last couple weeks. So, consumers can start or select consumers can start trading in Crypto now. So you've got Senator Bragg's report coming out and then a referral on Crypto CGT and Crypto to the border tax. So that's all next year. So I think Crypto is going to be quite an interesting new development. It's interesting to me and I hopefully interesting to a few other people I wouldn't ever in invest in it yet. I've got a house to pay off, but there are others who probably are less risk averse.

 

Robyn Jacobson:

Look, it's certainly one of those areas that a few people dabbled in it some years ago, but it is becoming much more mainstream. And for that reason, we're seeing increasingly more guidance from the ATO about the CGT implications. And of course the impact we in you're trading or exchanging for different Cryptocurrencies.

 

Jerome Tse:

Yeah. And whether it's a foreign currency now, we've got Ecuador, I think-

 

Robyn Jacobson:

El Salvador.

 

Jerome Tse:

El Salvador, sorry, using Bitcoin. So, there's some guidance to come out from the ATO hopefully next year, too.

 

Robyn Jacobson:

Really interesting space. And I want to watch next year. Marg, in the SME space, what's on the radar here?

 

Marg Marshall:

Uh, Robyn, we've got a few things that we've been waiting for a while. People are probably sick of us hearing from the Tax Institute that we're still waiting on, D7 reform that we've been promised now for years. There has been some indication that we are likely to see something early in the new year around D7 [inaudible 00:14:15] 100. So I guess it's a watch this space with that one, but does seem as though there is some traction going on there that's, as I understand it, the ATO talking, we're still not really sure what treasury are doing.

 

Robyn Jacobson:

That's correct. What we're hearing. And this was a shared at a recent conference. We ran in [Mosa 00:14:33] we are of still of course waiting for treasury to release draft legislation on the proposed reforms, which- we are now up to nine and a half years from when the measures were first reviewed by the Board of Taxation. And certainly we're talking about five years or so since the government committed to reforming them. This is [separate 00:14:51]. So the ATO is looking at the current D7 guidance that the ATO's published. And they're looking at putting out some fresh guidance early next year. So I think it's important to note, this is quite separate from any legislative reform that treasury might initiate or progress.

 

Marg Marshall:

Yeah. So I think it's important for us to note, to be across that. And of course when that guidance comes out, we will be putting material out to our members and no doubt offering training, but it's a really good distinction that Robyn points out that this is not legislative reform, which is what we've been waiting for. So, we continue with a bit of uncertainty there. The other big thing that I suppose we can all expect is the analyzed version of the PCG 2021 D2, which of course is the allocation of professional firm profits. So that's obviously very dear to a lot of our members' hearts, and it'll be interesting to see what the ATO have done with our voluminous submissions that have come through from various parts of the profession. We certainly put our own in, and there was a joint submission as well. So I'm very keen to see what it looks like in terms of my own practice. And I know others are as well.

 

Robyn Jacobson:

PCG is scheduled to be released on Thursday the 16th of December. It will be interesting to see if it doesn't indeed get issued that date. And then of course the reaction of the profession to what is finally published. But we do know that there will be an additional 12 months in terms of its application date. So it's now going to take effect from on July 2022, which is a positive and a sensible outcome.

 

Marg Marshall:

Yes. As it should be, Merry Christmas, like thanks ATO, maybe they'll listen, but maybe they won't, but we'll see. Yeah.

 

Robyn Jacobson:

All right. So vision for next year, both of you move into formal leadership positions on National Council and as Directors of The Tax Institute. So Jerome is President and Marg is Vice President. What are your respective visions? And I'll start with Jerome first. For next year, what would you like to see as a legacy of your presidency and, and the Institute more broadly achieves throughout next year? And by the way, I'm not going to hold you any commitments in this podcast.

 

Jerome Tse:

Marg will though.

 

Marg Marshall:

I've got, I'm taking notes Jerome.

 

Jerome Tse:

I think the first thing is I think looking at our, the diversity of our membership and making sure it's reflected in all our committees, councils, event organizing committees events and so on, and also to try and attract new members who might not normally be members. So that's really important for us. I think that's been important for society, I think in the last couple years, if not more. So I'm really keen to get a formal diversity policy up and running with Joanna Price. Who's the GM of people and culture at The Tax Institute, making sure our members don't burn out is really important supporting members through education, advocacy, and so on. Just what, what do members need? We're looking at a new website. I know we've said this a few times, but I mean, going back to the industrial issues, trying to find IT staff, in all our businesses has been difficult. So it is a little bit slower than what we'd ideally like, but we want to get a website that works for our members. So, that is coming next year. There are a few other things Marg, you might want talk about Micro Credentials and things, but that's quite exciting.

 

Marg Marshall:

Yeah. Jerome, I'm happy to... Like Micro Credentials, is a new way of learning that probably a bit of a buzzword out there in learning and education, but we've taken on the challenge of turning some of our programs into really tiny bite sized bits. So you can get hold of a small, maybe a 10 minute or a 20 minute online learning program, do that and build up your knowledge that way. So these little bites like chunks that, you just might want to understand one section of Div 152. So, you've got something a bit quirky on the CGTS, more business concessions. You get, you've got the basics down, but you've got something that's a bit out of the ordinary. So you can go through the catalog of Micro Creds and find that bite size bit. It doesn't, it's not going to be hideously expensive to do the course.

 

Marg Marshall:

You're not committing to 10 hours. It's not a whole day thing, you can do it when you want to. And it's meant to be something that you can get in, do it, and then get on with your work and, hoping to launch that in this coming year. And that will grow as we go. The first offerings will be limited because to Jerome's point about IT staff, and all of that sort of stuff, we've got lots to do in terms of making sure that the learning content is right as well. So there's a fair, there's going to be a lot of rigor behind this and, it will be something that you can hang your hat on. We're really excited by the prospect that people can get what they need in the timeframe that they wanted it and in something that's easy, and not too time consuming.

 

Marg Marshall:

So looking forward to seeing that come to fruition and look, we are really interested in seeing how people's careers are going. What makes your career in tax actually meaningful? Look, I'm really, really quite proud to say well, to have been involved with The Tax Institute over the last couple of years through the pandemic, the amount of work that we did that supported our members, all of the webinars that we did around job keep and cashflow boost and, and the stuff that was done for the state based stimulus packages, all of that was provided as part of your membership. And so we want to make sure that our community is engaged, that we continue to see that happen. People are seeing this as a valuable thing to have in terms of their membership and that they can be either involved just via the learning and the training opportunities that are provided or get involved in other ways. So we are really looking forward to seeing how that pans out for next year.

 

Robyn Jacobson:

You talk about diversity. I think about how diverse tax is. It touches everything we do. And I don't just mean we as tax professionals, everyone in the community, whether you're a business owner, an investor, a retiree, an employee, you work in the gig economy, tax affects everything. And so everyone can be part of this conversation about how to improve the system? How to improve engagement? How to improve... How the regulators do what they do? And The Tax Institute's got a really important role, not just for our members, but also more broadly for the community.

 

Jerome Tse:

Now that's that's right here. And I think diversity, I mean, may not just mean gender or ethnicity. It can mean getting more younger people involved, or getting the older, and, who have the wisdom, who might be retired and getting them back involved in the community as well, even though they might not be practicing anymore. They've got an important part to play in the system as well. So, I am interested in making sure that we, our membership and our offerings are diverse to meet those diverse audiences because the TTIs vision, isn't just for our members it's to improve the system for the community generally.

 

Robyn Jacobson:

So, as we draw the year to a close and thankfully we can draw a line under this very challenging year, how are both of you going to stop and recharge over the Christmas break and come into 2022 with your new roles and, lots of fighting energy to take on all the challenges of next year?

 

Marg Marshall:

Is probably common enough, in a number of offices. Well, I hope it's common. We will close on Christmas Eve. The lead up to Christmas in our office is amazing. Really, we do Christmas very well in our office with lots of things on lots of celebration, secret Santa and Christmas decoration competitions and all sorts of stuff. So the office looks a bit like Maya with the windows and things.

 

Robyn Jacobson:

Santa's Workshop?

 

Marg Marshall:

Yeah. Yes, somebody just walked past my office carrying a Large Life-Sized Elf. So, it's on. So we will close until the 4th. Then, I am going to take a break in January. I'm having the second two weeks of January off and having beach time going to a lovely spot. One of my favorite parts of Tassie, The Bay of Fires. So really looking forward to 10 days at the beach. And yeah, so that's my way of having a bit of a break.

 

Robyn Jacobson:

[inaudible 00:23:06] feeling the sand between your toes instead of the keyboard under your fingers.

 

Marg Marshall:

Absolutely. Right. Robyn, absolutely. Right. Yes.

 

Robyn Jacobson:

And Jerome?

 

Jerome Tse:

Probably just trying to find short breaks in New South Wales, maybe Queensland now that I'm allowed to go and Tassie as well. I mean, Marg knows I can [sort a 00:23:23] Tassie holiday earlier in the year because of coronavirus. So might head back down there and visit Mona in Hobart and just recharge for the new year.

 

Robyn Jacobson:

Well, thank you both for coming on the show, it's been wonderful to chat to you both, and hear about your visions for next year. I also want to thank you on behalf of The Tax Institute for the work that you do for us and the work you have done and will do into next year. So, I hope you have a wonderful break and come back with all that wonderful energy we're going to need from you both.

 

Jerome Tse:

Thanks Robyn. And just thank you to all our members as well. You've done a great effort over the last year, two years, to help support the community through this job keep, job saver, all the New South Wales and state support packages. I know you're tired. We're here to help you next year. Our goal is to help you educate not just in technical, but in practical ways in wellbeing. Hopefully, we'll see you in person in some events as well. That hopefully that starts again. And I know Robyn, you are reaching to get going and seeing people around the country. So hopefully we'll get to see you all in 2022.

 

Robyn Jacobson:

Okay. Those sentiments. Exactly. Jerome, it's been an amazing year. The profession has absolutely stepped up. Everyone should be incredibly proud of themselves, but absolutely recharge and, take that will deserve break. And we look forward to seeing it some face to face events next year. So, thank you for listening to this episode of Tax Vibe. I've been chatting with Jerome TaxVibe, partner King and Wood Mallesons, and the 2022 President of The Tax Institute and Marg Marshall, partner at WLF Accounting and Advisory and the 2022 Vice President of The Tax Institute to keep up to date with Tax Vibe, be sure to subscribe, rate, and review wherever you listen to your podcasts. If you'd like to connect with us on social media, follow The Tax Institute on LinkedIn, Facebook, Instagram, and Twitter, you can join the conversation on our member only community forum, @community.taxinstitute.com.au. Not a member of The Tax Institute? Join a collective voice of 15,OOO practitioners at the heart of the profession and find out what the best tax professionals have in common. Join today, and save 50% on membership. For more information, visit taxinstitute.com.au/membership. You can also contact us by emailing taxvibe@taxinstitute.com.au. On behalf of The Tax Institute, I wish you all a safe, relaxing and happy festive season, and we look forward to you joining us next year. 

Episode 14 — What’s on the radar with SMSFs?

Release date: 11 Nov 2021

In this episode of TaxVibe, Robyn chats with Liz Westover, Partner and the National SMSF Leader at Deloitte, about the current state of play with self-managed superannuation funds - including the latest legislative changes, the array of contribution caps, and tips for those considering setting up a SMSF.

 

Host: Robyn Jacobson, CTA, The Tax Institute 

Guest: Liz Westover, FTI, Deloitte 

 

 

 

 

 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. We love the vibe of tax and here at The Tax Institute, we do tax differently.

 

Robyn Jacobson:

I'll be chatting with some of the tax professions 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'm joined by Liz Westover, the Partner and National SMSF Leader at Deloitte. 

 

Robyn Jacobson:

Liz is responsible for the firms' SMSF service offering, providing compliance and advisory services to the firm's clients. Liz has extensive experience in superannuation and has strong capabilities on the technical application of superannuation and associated tax laws. She is a regular commentator on superannuation issues with mainstream and social media and has also blogs and articles on superannuation and related issues for many years.

 

Robyn Jacobson:

Liz has been heavily involved in superannuation policy development and advocacy, regularly liaising and consulting with government, regulators and stakeholders on technical, legislative and policy matters. Liz is a Fellow at The Tax Institute, a Fellow Chartered Accountant, CA SMSF Specialist and holds a Master of Legal Studies from the University of New South Wales and a Bachelor of Business from the University of South Australia. So in this big week of The Tax Summit, Liz, welcome to TaxVibe.

 

Liz Westover:

Thank you, Robyn. Lovely to be here.

 

Robyn Jacobson:

Great to talk to you and look, we did have a chat earlier in the week. You've already run your session for The Tax Summit. And in terms of this week, you're one of more than 100 speakers at our event, The Tax Summit: Challenge Accepted. 

 

Robyn Jacobson:

So as we are emerging from a very long COVID period and particularly, you and I in Melbourne where we have been locked down more than any other city in the world, how important is it for you, as a practitioner, to be able to reconnect with your peers, even if it's in a virtual environment at the moment?

 

Liz Westover:

Critical, Robyn, I think. And these online sessions and virtual sessions and things like that, they do become difficult and that craving to be face-to-face with people is almost palpable at the moment, especially as the end is in sight for us. 

 

Liz Westover:

But it does make these online events even more critical than before, simply that we're not face-to-face with our peers and our clients and our staff members. So we've got to stay up to date and we've got to get that information through some forum, and I think The Tax Summit has been one of those vital forums for us to be able to do that. 

 

Robyn Jacobson:

Well, it's been great to have you as part of it. So I thought we'd have a chat today about of course your pet area, self-managed superannuation funds. Can we start with what's the latest on the legislative front? 

 

Robyn Jacobson:

We sometimes think that tax law moves very quickly and it's constantly changing and there's less going on in the super space, but when we start to work through the legislative changes in super, it's not a short list. So can you touch on some of the key changes that we've seen recently?

 

Liz Westover:

Absolutely. And you're spot-on. As I started to put this session together and I said, "Oh, my goodness. What am I going to talk about? There's not that much that's been happening." But as I started to collate it all, it became very apparent that there were lots of changes and some of them quite meaningful. I think probably one of the key ones that we've seen is the ability to increase the number of members in a self-managed super fund from four to six came through in the 2018, '19 Federal Government Budget.

 

Liz Westover:

I don't think anybody particularly asked for it, but I think now that it's here, people are really starting to see value in it, and I've certainly had a lot of inquiries from my clients asking, "Okay, can I now add the kids?" and so on and so forth. So I think it will be quite useful and people will make the most of it.

 

Robyn Jacobson:

That change has been a long time coming, hasn't it?

 

Liz Westover:

It has but it is now effective from the 1st July 2021. So we're off and running. But probably a couple of things to think about and number one is, think about why you're adding extra members in the first place. And we've always said this, whether it was four members or six members was your maximum, think about who is in your fund.

 

Liz Westover:

Because those people that are in your fund have a lot of control over your benefits and particularly in payment of death benefits and so forth. And those people have a say in how that fund is run. So if you want to bring the kids in, that can be well and good and there might be some really good reasons why you do that, but those kids have just as much say in how that fund is run. 

 

Liz Westover:

They have a lot of visibility about your own benefits as a parent. They'll know what you have. So if those sort of things, you'd rather keep separate from your kids then perhaps you don't want to bring them actually into the fund and if you want to help them, you might set up a separate fund.

 

Robyn Jacobson:

Because of course the main rule that the member in a self-managed fund, of course, has to be the trustee as well.

 

Liz Westover:

That's right. All members are trustees and all trustees, members. And of course payment of death benefits generally in an SMSF death benefit, in the absence of any binding death benefit nominations, remaining trustees decide who receives those death benefits. So do you want your kids to decide who gets your benefits? Do you have blended families in the sense of who's making decisions, who's going to have control where you want those benefits to go to? 

 

Liz Westover:

Think about who's coming into your fund and who actually has the control. But in a practical sense, there's probably a couple of other things to think about is check your trustee. Always check your trustee. And a lot of practitioners in this area is, "Check your deed, check your deed, check your deed. Read the deed."

 

Robyn Jacobson:

Liz, it's interesting that you say that because we ran a podcast recently with Paul Hockridge and we were talking about trust and unpaid present entitlements, and repeatedly throughout that discussion, he said exactly the same thing. So because a super fund is a trust, there's no escaping the deed.

 

Liz Westover:

No, that's exactly right. So I've had some clients already talk to me about increasing the number of members, adding members, and what we found is with some deeds, they're actually hard-coded, restricting the number of members in the fund. In fact, the first inquiry I received from a member, I had a look at the deed. Sure as eggs, there it was, no more than four members in the fund.

 

Liz Westover:

So it's hard-coded into his deed. So no matter what the law says, his deed says he actually can't have more than four members. So if we want to increase the members, if we're going to put in member five and six, then we actually have to get a deed update and to a deed that allows those additional members to come through.

 

Liz Westover:

But the other practical side of it too is trust law, so state-based trust law. Most states actually restrict the number of individual trustees of a trust to four. So in actual fact, if you're going to have more than four members, again, coming back to all members are trustees, and all trustees are members, if you want more than four trustees, you have to have a corporate trustee.

 

Liz Westover:

So you can certainly have six directors of a corporate trustee but you can't have more than four individual trustees. So corporate trustee, check your deed, think about you who you want as members of your fund.

 

Robyn Jacobson:

Very good. There's been another change and this is to do with making non-concessional contributions, and it's called the bring-forward rule so you can access two future years' worth of your non-concessional contributions cap. Can you run through the changes that are affecting people here?

 

Liz Westover:

Yeah. Not a huge change other than the age for which you can bring forward those contributions. So previously, it was maxed out at age 65. So if you're above age 65, you might still have the ability to make contributions if you're passing the work test, but you couldn't use the bring-forward provisions. Once you're over that age group, it just wasn't available to you.

 

Liz Westover:

So previously, we've seen changes to the work test. So that no longer applies up to the age of 67. And so now these new changes allow bring-forward provisions up to the age of 67 as well. So bit of alignment there between the work test and the bring-forward provisions and giving people a renewed opportunity. So my tip in that is probably go back and see which of our clients might actually have a renewed opportunity to make some last contributions into your super. 

 

Robyn Jacobson:

There's been a very technical change and this relates to where you've got someone in pension phase and then calculating how much of their income is able to benefit effectively from a tax exemption and actuarial certificate. So would you like to run everyone through that?

 

Liz Westover:

Yeah, absolutely. So we have this circumstance where you might have a fund that is wholly in pension phase for the whole year, but a member of that fund has a total super balance. So that's their balance within that fund and any other superannuation holdings they have, if they have a total super balance of more than $1.6 million.

 

Liz Westover:

What that meant was that that fund had what we call disregarded small fund assets. And the law says that if you are one of these types of funds with these disregarded small fund assets, is that you can't segregate your assets, which means you can't use the segregated method for calculating your exempt current pension income.

 

Liz Westover:

You are required to use the proportionate method to calculate it. And part of the proportionate method meant you had to get an actuarial certificate. Now, if you've got a super fund that is wholly in pension phase for the whole year, then what's that actuarial certificate going to say? 100%. Of course, it's going to say 100%.

 

Liz Westover:

So we have this red tape where people who are clearly always going to be fully exempt or be able to claim 100% exempt current pension income, were required to get an actuarial certificate and the cost that was associated with doing that for no added benefit whatsoever.

 

Liz Westover:

So the requirement to get that actuarial certificate has now been removed. If you're in that bucket, no longer have to get an actuarial certificate. So a really good practical, sensible movement in this piece of legislation.

 

Robyn Jacobson:

So not every amendment we get is an unwanted one. 

 

Liz Westover:

No, that's right. That's right. 

 

Robyn Jacobson:

Another change is coming through and in fact, there's a lot of talk about this outside the super space. I'm referring to the DIN, the Director Identification Number. Its genesis was in concerns about phoenix activity and people illegally moving around companies and using false names.

 

Robyn Jacobson:

And astonishingly, when you apply to be a director of a company, or you notify ASIC that you're going to be a director, you could basically tell them anything. They never verified the information you gave them. So now we're going to have this verification process and every company director's going to have a DIN. Why is that relevant to self-managed funds?

 

Liz Westover:

Well, the issue is that it equally applies to any body corporate that is registered under the Corporations Act and that applies to trustee companies as well because they are registered with ASIC under the Corporations Act. So any director of a corporate trustee of a self-managed super fund is going to have to have a Director Identification Number or a DIN as you said.

 

Liz Westover:

So we equally have to pay attention to this matter. Individuals only have to have one DIN across all of their directorships. So if you are a director in another entity, perhaps your own business and so forth, you can use the same DIN for your SMSF, but I imagine for a lot of practitioners out there, there's going to be a little bit of coordination that goes on around this one.

 

Liz Westover:

Interestingly, directors have to apply for the DIN themselves. It's not something that we can actually do for them. But clearly, they may not be aware that this is coming or in fact that it's here and that they will need it. So a little bit of coordination around making sure that they do get one or that they actually have one. And there are some dates that were released I think only last week around these transitional arrangements.

 

Liz Westover:

So big thing, big date for me really is that if you become a director for the first time between the 1st of November this year and the 4th of April next year, then you've got 28 days after your appointment to get a DIN. So in other words, if you're setting up a self-managed super fund with a corporate trustee, and I think there is a real trend towards using corporate trustees now for SMSFs, if you're doing that now, you are squarely in this regime.

 

Liz Westover:

Just really pay attention if you've got anyone that's setting up new funds. If you are in fact increasing your numbers from four to six and you've got an extra director coming in for the first time, they're going to need a DIN.

 

Robyn Jacobson:

And a couple of other tips to pass on, existing directors have until November next year to get a DIN.

 

Liz Westover:

That's right. Yes.

 

Robyn Jacobson:

And if you become a director from April next year, you have to get your DIN before you are appointed as a company director.

 

Liz Westover:

That's exactly right. And I think April is going to be upon us very, very quickly.

 

Robyn Jacobson:

Yes, it will.

 

Liz Westover:

So I think firms really need to get their systems and their processes in place to identify who actually needs one of these DINs and making sure that their clients actually get them.

 

Robyn Jacobson:

One more tip and I can almost hear some of the groans already coming through from our listeners. The best way to do this is using a myGovID. And as you correctly say, you can't do it as an agent on behalf of your client. 

 

Robyn Jacobson:

So they'll have to do it themselves. But myGovID is the best way to do this. Not myGov. That is different. You need a myGovID which is the identification process through, typically, a smartphone. There will be alternatives through telephone and paper but there will be delays, not as efficient and your experience is going to be much better if you do it through the myGovID.

 

Liz Westover:

And do you know what? My tip in that space will be I plan to do my own very quickly, as soon as I can. Simply because if I've been through the process myself, I can talk my clients through it. So I would strongly suggest that perhaps we take care of our own affairs first and then we're in a better position to help our client.

 

Robyn Jacobson:

Make sure the plumbers don't have leaky taps. 

 

Liz Westover:

That's it. 

 

Robyn Jacobson:

All right. And one more change that's worth noting of significance and that's to do with minimum drawdown rates.

 

Liz Westover:

Yeah. Look, this was another COVID-19 relief measure. So we saw an extension of the 50% reduction, the mandatory minimum that needs to be withdrawn and that's been extended up until 30th of June FY '22. So we've got this extra year of just reducing what we're required to withdraw from, from pensions. My tip there really is around when you apply the percentage, make sure you have the percentage first and then apply that reduced percentage to your opening balance or closing balance.

 

Liz Westover:

So you're doing closing balance to work out what your mandatory minimum actually is. The risk is if you apply the larger percentage of the old percentage and then halve the resulting figure, you may end up with this anomaly where you've actually paid less... rounding can force you to pay less than your mandatory minimum.

 

Liz Westover:

And it might sound like rats and mice but it can make a difference and it can detrimentally impact on your fund. So just be careful, apply the percentage first or reduce the percentage first and apply that against the balance.

 

Robyn Jacobson:

Okay. Good advice. Let's move onto the caps and gosh, there's an array of them. I've certainly written content about this previously and listed out all the superannuation caps we have in the system and it's quite extensive. Is it really necessary that we have this many limits and this many sets of rules to keep on top of?

 

Liz Westover:

Look, I don't think there'll be anyone that would argue that simplicity would be a much better way to go. And I think indexation, particularly around the transfer balance cap, is going to cause a lot of problems. And it is going to cause a lot of errors to be made and whilst we might have a handle on it around this first round of indexation, I think the next round of indexation is going to put people in a whole world of pain just trying to work out what their personal transfer balance cap is.

 

Liz Westover:

So previously, we haven't really been concerned about the difference between a general transfer balance cap and a personal transfer balance cap because it was all one and the same. It just didn't really matter. So we used this generic transfer balance cap. Now we need to start talking about what the general transfer balance cap is versus a personal transfer balance cap.

 

Liz Westover:

And that'll be different for different people depending on what they have or haven't done already around income streams. Basically, if a new transfer balance cap and your general transfer balance cap is the $1.7 million, if you are now commencing an income stream for the first time, your personal transfer balance cap will be the same as the general cap and that's $1.7 million.

 

Liz Westover:

But if you have previously commenced an income stream, so prior to the 1st of July 2021, you previously commenced an income stream, your personal transfer balance cap will not be the general transfer balance cap. And in fact, if you had previously used 100% of that $1.6 million cap, your personal TBC is $1.6 million and you have absolutely no ability to use the indexed amount to commence any future income streams.

 

Liz Westover:

And then if you are somewhere in-between that, then your ability to use any of the indexed amount, will depend on the proportion of the previous cap that you've actually used. So if, for example, you used 75% of the previous cap, so you commenced an income stream of, say, $1.2 million then you've got 25% unused cap. So you apply that 25% against the indexed amount, 25% of $100,000 gives you $25,000. So your new personal transfer balance cap will be the $1.6 million that you previously had, plus $25,000 of the indexed amount. So 1.625 is your personal transfer balance cap.

 

Liz Westover:

So a little bit confusing already, so imagine how it's going to look when we have indexation again and we're trying to work out what proportions people have actually used of previously indexed amounts and so forth. So gee, I wish we had some simplicity around that.

 

Robyn Jacobson:

Liz, it's hard to point to any other cap, threshold or limit anywhere in the tax or superannuation law that is indexed but the indexation isn't provided to everyone. So if you think about everything else that has increased out there from year to year, all taxpayers, all classes of taxpayers who come under that particular set of rules, benefit from it.

 

Robyn Jacobson:

But in this particular case, it's only those who had started a pension and not fully exhausted the 1.6 to begin with and that's a proportionate amount, or you get the ones, of course, who never started an income stream till later and they get the full benefit. But everyone's going to have their own special personal transfer balance cap. The complexity in the system's going to be extraordinary.

 

Liz Westover:

Absolutely, absolutely. And I think it's only going to get worse. And that is compounded too because we often use, previously, that $1.6 million as a reference point for other measures. So for example, your ability to make non-concessional contributions. And in fact, in some areas of law, and in the one we talked about previously about actuarial certificates, that is hard-coded at $1.6 million.

 

Liz Westover:

That amount, when you talk about a person's total super balance in terms of determining whether they have disregarded small fund assets, that's hard-coded, that $1.6 million. It's not indexed. So now not only do we have some thresholds, they all started from this one reference point, but now some are going forward, some are not, some are played differently to different people in different ways. Of course, it's going to get confusing and people will make mistakes. 

 

Robyn Jacobson:

We've also got, for good reason, delays in reporting by self-managed funds of the transfer balance account data known as the TBA. And they, of course, report on a quarterly or an annual basis depending on the size. But the delay in getting that information to the ATO then results in of course that then delayed passage of information back to the members. 

 

Robyn Jacobson:

And where I'm hearing this is particularly becoming a problem, is you've got people giving advice to individuals on how much they should contribute or what their fund should do with the options available to them, who don't necessarily have access to that data that is on myGov, which is the individual's own account, or through online services for agents which is only available to tax agents.

 

Robyn Jacobson:

Now those agents, of course, shouldn't be giving advice on super. So we've got this category of people like lawyers, people like self-managed fund administrators and financial advisors who are almost at the front-end of giving the advice but it's the agents, the tax agents who have access to the data through [OSPA 00:19:27] who are dealing with the tax implications if they happen to get it wrong.

 

Liz Westover:

Yeah. And you're spot-on, Robyn. And we often talk about tax agents but there is often a difference between the tax agent for the fund and the tax agent for the individual. You actually have to be the tax agent for the individual to be able to get access to that information. So you're absolutely right. This is a cohort of people who need the information and can't actually access it.

 

Liz Westover:

It is a real challenging area. I think APRA-regulated funds have a much tighter timeframe within which to report but nevertheless, it still takes time to do calculations and work out what's going on to be able to report that information.

 

Liz Westover:

Self-managed super funds, in particular, we often don't do the accounts until May or June, the year after the end of financial year. So there is a huge delay in all of this. But I'd also say that if you're in an SMSF, you've got access to that information more readily or to find that out before you make decisions around commencing income streams and so forth. 

 

Liz Westover:

So if I'm looking after an SMSF client, my first point of call is what other funds have you got? Let's check that out. Let's check what the valuation is and then determine what capacity or what balance we actually have to commence an income stream out of the self-managed super fund.

 

Liz Westover:

So yes, it's challenging to get the information but it's not impossible. And I think we just have to make sure that we get the right relevant timely information before we advise the clients about commencing income streams.

 

Robyn Jacobson:

I think it also illustrates the importance of getting proper advice. Now self-managed, you do have to take responsibility for trustee decisions that you make but equally, you've got to make sure you're getting the right advice because we all know that you can't cry foul later and say I didn't know or I wasn't aware of the laws and how they operated because it's not going to get you anywhere.

 

Liz Westover:

Yeah, absolutely. Absolutely.

 

Robyn Jacobson:

All right. So moving onto some other issues, can you give us an update on what's going on with SuperStream?

 

Liz Westover:

Oh, heavens. Yes. So look, SMSFs have been familiar with SuperStream for a little while and their notion of having an electronic service address. We've had to be in that regime for quite some time where a super fund was receiving employer contributions. 

 

Liz Westover:

So employers have been legally obliged to use SuperStream to make those contributions and that meant if an SMSF was receiving them, they had to have an ESA to be able to receive those contributions. So we're kind of familiar with these concepts. And I would suggest most funds would have an electronic service address.

 

Liz Westover:

What's new around all of this is that from the 1st of October this year is that rollovers in and out of self-managed super funds must now be undertaken by SuperStream as well. So APRA funds will not roll over into an SMSF and [inaudible 00:22:08] via SuperStream and equally, SMSFs in-between themselves, can't actually do it. 

 

Liz Westover:

It's all got to be done via SuperStream. And that means technology is going to play a big role because that's exactly what SuperStream is. It is a data and payment standards around employer contributions and rollovers in the super industry that's done electronically for consistency around payments and the associated data that comes with it.

 

Liz Westover:

So we absolutely have to be involved. Now, it's not always as easy as you think and timing is everything, and getting it wrong can be quite problematic as well. So there are 20 penalty units which is $4,400 per trustee if you actually get this wrong. So main thing to remember is that once full information is received requesting a rollover, you actually have three days to roll it over. And that applies to self-managed super funds as well. 

 

Liz Westover:

So if you are looking at rolling over from a fund, be very careful about when you pull the trigger on getting that rollover done. You don't want to go to your new APRA fund and request it because once that comes through, you've got three days to do it. And I would suggest that most funds are going to take a lot longer than three days to actually bring member records up to date to determine a balance and be able to process that rollover back out of the fund.

 

Robyn Jacobson:

So if you're a trustee of a self-managed fund, where's the best place to go to look for information on these ESAs?

 

Liz Westover:

Yeah. Look, there are a couple of points around that one. So as I said, most SMSFs are going to have an electronic service address. Anyone that uses the three major software providers, they all provide an ESA service. There's probably a dozen or more providers already around ESAs, but not all are compliant with rollover.

 

Liz Westover:

So there are a number of ESA providers out there that are capable of doing employer contributions, they are not yet capable of doing SuperStream rollovers. So speak to your provider and your ESA and there is also a list on the ATO website that'll tell you who the providers actually are and what they're capable of doing, either employer or rollovers. And if you're looking at rollovers, you may need to change your ESA provider to be able to actually facilitate a rollover.

 

Robyn Jacobson:

For those who are not yet compliant for rollovers, would you expect that they will be at some point? It's just a case of them catching up?

 

Liz Westover:

I believe so. I believe there are a lot of providers out there who are taking steps to become capable around rollovers, but that's a business decision for them as to whether or not they actually do that. The other thing to remember about SuperStream, Robyn, is it's not mandatory to have an ESA.

 

Liz Westover:

If you are not receiving employer contributions and you're not making rollovers or receiving rollovers, you don't have to have an ESA. It's not mandatory to do that. The ATO will be processing a number of their release authorities through SuperStream as well, so you will be receiving DIV 293 excess contribution release authorities and so forth via SuperStream.

 

Liz Westover:

But again, if you don't have one, they will still issue those by paper. So it's not mandatory to have one unless these events are actually happening in relation to your fund. 

 

Robyn Jacobson:

But like most things, I'm thinking of Single Touch Payroll and myGovID and all these other digital initiatives. It is designed to make life easier and more efficient to deal with the government.

 

Liz Westover:

Look, and I think it will eventually. It feels a bit clunky at the moment, and I think that's because it's a new process, we're not getting information in the way that we used to. And even at the moment, there is a flow of information into the fund, but we don't have that document that we normally get. So like a rollover benefit statement. We don't have it yet and it's making sure that we get it so that we've got complete files so that we can prove it to the auditor. Those sorts of things.

 

Liz Westover:

So it's still finding our way around it. We've started doing our first ones already and we're just really taking our time in terms of dotting the Is and crossing the Ts to make sure that we get all the right information and certainly, if we're requesting rollovers. So now I can go and request a rollover from an APRA-regulated fund, is making sure you've got the authority from your client to do that.

 

Liz Westover:

Because the last thing you want to do is process a rollover for their full balance when they didn't actually intend for their full balance to come over and you've just blown up all their insurance in their APRA-regulated fund. Make sure that you're getting those authorities signed to actually process the rollovers. 

 

Liz Westover:

But equally, you've got to make sure that the ATO actually has up to date information for the fund. So it must have obviously the member details, so particularly around if you're adding members and you're trying to do rollovers, make sure that you give the ATO time to update their data so that when the APRA-regulated fund checks, it's all good. 

 

Liz Westover:

They can say, "Yes, that person is a member of this fund and it's all correct." The fund has to have an ABN, they have to have a unique bank account and of course, they must have an electronic service address. So you've got to just line up all your ducks before you press the go button.

 

Robyn Jacobson:

So it sounds a bit like the toddler's walking but still needs to be a bit steady on their feet.

 

Liz Westover:

I'd say that's quite a good analogy, yes.

 

Robyn Jacobson:

Okay. Now, we could talk for a long time about this but with the limited time we've got, can you identify the main concerns the profession has with NALI and NALE? And I've not yet found a way to distinguish audibly between the two. So non-arm's length income, NALI with an I, and non-arm's length expenses, NALE with an E.

 

Liz Westover:

I hear you on that one and it's NALI or NALE, I'm not sure. But I absolutely agree with you on that one. In a real nutshell, what they're saying, is non-arm's length expenses. So if you're not paying enough or you're not paying anything for services to the fund, or that the fund receives, then it's going to invoke non-arm's length income provisions. 

 

Liz Westover:

And that means income associated with that or has a sufficient nexus to those expenses will be taxed at the highest marginal tax rate of 45%. The real concern in the industry at the moment, because this isn't new law, this has been around since 2018. So the real concern in the industry at the moment is the Law Companion Ruling that came out recently from the Tax Office.

 

Liz Westover:

And in particular, the real sticking point around this is the ATO has a view that general expenses has a sufficient nexus to all of the income of the fund. So when we talk about general expenses, we're talking about accounting fees, audit fees, financial advisor, investment management fees. Those things that don't have a particular nexus, in the way a property manager would to a property. You've got that direct link.

 

Liz Westover:

We're talking about things that apply really to the whole fund. So if they are deemed to be non-arm's length expenses, then we have a problem for all of the income of the fund. So the ruling has been widely criticized by the profession and rightly so. I don't think that they have really made their case around sufficient nexus between the general expenses and the income of all of the fund and I certainly don't think that that was what was intended when this legislation was brought in.

 

Liz Westover:

So needless to say, there's a strong push and quite an aggressive push by industry against these reforms and I think Minister Hume said at The Tax Institute Super Conference that they are well aware of this issue and that in fact, they would be looking at it. No promises or anything like that by any means but at least we know she's aware of the issue.

 

Liz Westover:

And hopefully, we'll see some change, but I think for us as practitioners, how many of us are used to getting our firms to do our own funds? How many financial advisors are used to providing their services to their own funds? And we've seen a very gray area arise. It's not been clear where the line is actually drawn on trustee providing services in your capacity to a trustee, versus providing services in your capacity as an individual.

 

Liz Westover:

And this is where I kind of struggle with it is because I'm skilled at what I do, why can't I do that for my fund? And why do I have to pay for those services when anybody else who's not a tax agent, can legally still do all their own accounts and lodge their own tax return and in fact, they can't charge for that service. But because I am a tax agent, I must. So I really struggle with that a little bit and I just don't think that is consistent with our overriding drive to increase retirement savings.

 

Robyn Jacobson:

And there's a real tension also between the SIS Act which regulates what funds can do which says you can't charge for your services as a trustee and this rule which is saying you must charge otherwise, you'll have a NALI problem. 

 

Liz Westover:

That's right.

 

Robyn Jacobson:

And I know it's a great concern to the profession about does that mean I have to charge or does that mean I can't charge for my accounting services? I would draw everyone's attention to the examples that I think it's around example six to 10 in the ruling which is 2021/2. It's a Law Companion Ruling, an LCR, where it does talk about if I'm a trustee who's an accountant versus I'm a trustee who's an electrician.

 

Robyn Jacobson:

And it seems to go with this argument if I'm providing accounting services then that's a trustee capacity, so it's okay if I don't charge for that. But if I'm providing electrical services to my rental property that's in my fund, then if I don't charge for that, I would have a NALI problem. And it is gray, it's awkward.

 

Liz Westover:

Absolutely. And it's all well and good to give examples where there is extreme differences between the two scenarios but as we all know, in real life, that is rarely the case. And you can imagine a whole heap of scenarios that are somewhere in the middle and people not knowing how to actually apply it.

 

Liz Westover:

The other thing in that ruling too which I think people should pay attention to too, is they talk about acquisition of an asset is really important in this context. So if acquisition of an asset is deemed to be not on an arm's length basis, then the asset is actually tainted for life, and that includes capital gains.

 

Liz Westover:

So that's actually huge. So get your financing wrong, don't do the purchase at a market value, you've tainted the asset for life. All of the rental income or the dividend income, whatever it might be, including ultimately your capital gain.

 

Liz Westover:

And we also know that typically what people do is there might be a... when an asset is acquired by the fund, let's say it's a business real property, there might be a portion of a purchase and a portion that's done as an in-specie contribution. And this ruling makes very clear that if you do not document correctly then that document actually says that you might have non-arm's length expenses, regardless of the fact that you might journal an in-specie contribution within the fund.

 

Liz Westover:

So even though you think you've done everything right, maybe you think you're doing it the way we've always done it in the industry, you could be causing your clients to actually have non-arm's length expenses and around an acquisition of an asset, tainting that asset for life. So it is critical that the documentation around acquisition of assets where it includes an in-specie contribution component is documented correctly and meticulously or we're going to have a problem.

 

Robyn Jacobson:

A lot of work has been done by The Tax Institute in conjunction with the other professional bodies, and I'm not just referring to the traditional accounting bodies either. We've been involved with superannuation industry groups, it's a really broad group of organizations that have been working together. So it'll be interesting to see in the months ahead and we do hope that the government does listen to the concerns of the profession.

 

Robyn Jacobson:

But there's one piece around the ATO's interpretation of the law through this final ruling and there's another piece around the policy that of course the treasury and the government are responsible for. Now maybe there's a tweak that could be made to the legislation itself which is merely to clarify how the law was intended to work, and maybe if that could be done and remove something like a problem where there's $100 discount on electrical work done on my rental property, shouldn't taint all of the income earned from the $10 million worth of my assets in my fund and all my future capital gains forever either. It's just nonsense.

 

Liz Westover:

When you think about it, the genesis of this legislation was really around limited recourse borrowing arrangements that had related party loans. And at the time, people were doing it with 0% interest rates. The safe harbor provisions actually took care of that. So we've now got this piece of legislation that's come in with a fairly disproportionate approach to something that's already been resolved.

 

Liz Westover:

But moreover, it not only affects self-managed sup, it actually affects APRA-regulated funds as well. And I'm sure that from these little old LRBAs way back when to now having what could be a catastrophic impact on APRA-regulated funds, it's not right. And that's what I mean by what I said earlier is I don't believe this was ever the policy intent.

 

Robyn Jacobson:

Well, let's hope that this is rectified because as you say, the impact on not just the self-managed sector but the APRA-managed funds as well. The profession's aware of this, the sector's aware of this, there's such unanimous agreement that this needs to be fixed and we can only hope that the government... Well, we know they're listening. We hope they do something about it.

 

Liz Westover:

Well, all I can say, Robyn, is in all your efforts, you are very much backed by the profession as well as to get some resolutions around this one. So thank you very much.

 

Robyn Jacobson:

Thank you. That's good to know. All right, just as we wrap up, what would be your top tips for someone who has or is considering setting up a self-managed fund? Now you could write a book on this but what would be your top three tips?

 

Liz Westover:

I think some of my points from earlier is if you're setting up a fund, think about who you're in the fund with. Who has control? Who you want in it? Who has visibility? All those sorts of things. I think for anyone, and this is probably not just around people setting up a fund, anyone who's in a fund as well, is think about your exit strategy as well. 

 

Liz Westover:

I think that has become critically important and I am still amazed by the number of people who think that superannuation is dealt with as part of their will and not understanding that actually, super is dealt with quite separately from your will, unless you specifically direct it to go into your estate and then it will be distributed as part of your will.

 

Liz Westover:

So I think that's the missing piece. And also too is that super also effectively has death tax. So a bit of planning around that exit strategy as well and understanding is that if you have a taxable component in your self-managed super or within any super, a taxable component that's paid to an adult beneficiary, adult child, will be taxed at 15% plus Medicare on the taxable component, which for some big funds, that can add up to millions of dollars that you're going to hand over to the Tax Office if you don't.

 

Liz Westover:

And there's planning that we can do around this. There's absolutely planning. And that's part of having an exit strategy for your fund. And probably my only other tips is just dot your Is and cross your Ts. Just make sure you've got your deeds, you get your deed from a reputable provider that gives you a lot of flexibility about what you do within your fund. 

 

Liz Westover:

Fill in your forms and moreover, make sure as a new trustee of a fund, you actually understand the roles and responsibilities that you have in running your own fund. The ATO requires you to sign an ATO trustee declaration form. Read it, understand it and if you've got any questions, speak to your advisor. 

 

Robyn Jacobson:

Liz, my observation about what happens when you die, you'll know the figures better than I will, the total amount that's held in superannuation at the moment.

 

Liz Westover:

We're at $3.3 trillion is currently sitting in superannuation at the moment. SMSFs have about 822 billion.

 

Robyn Jacobson:

822 billion. Okay. And we know that we've got an aging population. Now follow me through here with joining all those dots. Aging population with a significant amount held in super, we've got the introduction of the transfer balance cap, which one of the effects is you can't retain amounts in super beyond death unless it's in a pension.

 

Robyn Jacobson:

And the pension through the transfer balance cap is limited in terms of the assets that we can hold in it. So it's not like you can die and just leave the rest of it sitting in an accumulation account. So my point is it's ultimately going to have to exit the fund through death benefit payments. 

 

Liz Westover:

Yes.

 

Robyn Jacobson:

Now if you've got, say... And I'm being conservative. I know some people have far less but you might have a $5 million fund, $10 million fund, a $15 million fund. Once that money comes out, we've got very strict rules on how much can go back in. $25,000 or now $27,500 a year or you've got your $110,000 as a non-concessional depending on age et cetera. 

 

Robyn Jacobson:

It's going to take you a lot of years to get that amount back into the fund if that amount is coming out. So my point is we're going to see a massive shift of wealth in the decades ahead out of the superannuation environment into... ?

 

Liz Westover:

Absolutely.

 

Robyn Jacobson:

Is it held privately? Is it held in trust? Is it held in companies? What does that do to revenue collections because what might have been taxed at 15% or 0% depending on how the amount was held in super, versus how that income is taxed outside the super environment. I think this will be fascinating to watch.

 

Liz Westover:

Look, it absolutely will. And I think the big funds, those SMSFs that have got big balances, they're legacy products. As those people die and we cannot get those volumes of balances into super anymore, we're not going to see many of those big funds. But that means there's a lot of planning that goes around those particular ones. 

 

Liz Westover:

And what I would say is, and I'm doing a lot of work with my clients at the moment around this, is where they've got business real property in the fund, so the business succession can actually depend on their ability to manage what's going on in their fund. So I've got situations where there's a very chunky asset that's held in the fund, it's being used by the family business. 

 

Liz Westover:

If one of those members dies, we actually have to get it out the fund. It cannot stay in the fund anymore. How do we do that, to your point earlier? Ultimately, we might want it held in a family trust but you can't pay it out from the fund to a family trust. So does the family trust have assets to actually purchase that asset? So a whole heap of planning that goes on around just getting benefits out of super. 

 

Robyn Jacobson:

Well, there'll be no shortage of work in the years ahead for the profession, that's for sure.

 

Liz Westover:

No, it's almost a semi-profession itself for SMSFs, isn't it?

 

Robyn Jacobson:

Absolutely.

 

Liz Westover:

It's very busy.

 

Robyn Jacobson:

Liz, thank you for your time. I think again, you've highlighted not just the complexity ongoing in the super space but the volume of changes. It never stands still and always a challenge to keep on top of what's going on, but thank you for your insights.

 

Liz Westover:

My pleasure.

 

Robyn Jacobson:

Thank you for listening to this episode of TaxVibe. I've been chatting with Liz Westover, Partner and the National SMSF Leader at Deloitte. To keep up to date with TaxVibe, be sure to subscribe, rate and review whenever you listen to your podcasts.

 

Robyn Jacobson:

If you'd like to connect with us on social media, follow The Tax Institute on LinkedIn, Facebook, Instagram and Twitter. You can join the conversation on our member-only community forum at community.taxinstitute.com.au. Not a member of The Tax Institute? Join a collective voice of 15,000 practitioners at the heart of the profession, and find out what the best tax professionals have in common.

 

Robyn Jacobson:

Join today and enjoy 14 months membership for the price of 12. For more information, visit taxinstitute.com.au/membership. You can also contact us by emailing taxvibe@taxinstitute.com.au. We look forward to you joining us next time. 

Episode 13 — Delving into trusts and unpaid present entitlements

Release date: 28 Oct 2021

In this episode of TaxVibe, Robyn chats with Paul Hockridge, Principal, Hockridge Advisory Pty Ltd, about the current state of play with trusts and unpaid present entitlements, including a discussion on section 100A. 

 

Host: Robyn Jacobson, CTA, The Tax Institute 

Guest: Paul Hockridge, CTA, Hockridge Advisory Pty Ltd 

 

 

 

 

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. 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 professions, great thought leaders who will share valuable and practical insights you may not hear every day. We hope you enjoy this episode of TaxVibe.

 

Robyn Jacobson:

I'm joined by Paul Hockridge, the principal of Hockridge Advisory Proprietary Limited. Paul has worked for the ATO, a large law firm and has been a partner in medium and big four chartered accounting firms and a multi-family office. He has over 30 years experience in tax, asset protection, estate and succession planning. Paul's niches include litigation support, property development, and FBT and salary packaging. Paul specializes in advising high wealth families and closely held businesses, as well as providing support for a number of accounting and law firms.

 

Robyn Jacobson:

Paul maintains a practicing certificate as a legal practitioner in Victoria. He is a fellow of Chartered Accountants, Australia, New Zealand. He's a senior fellow and teaches in the masters program in the law school at the University of Melbourne. And he is a chartered tax advisor with the Tax Institute. Paul sits on the Tax Institute's National FBT and Employment Taxes Technical committee, and contributes to the Tax Institute's book, estate and business succession planning. Paul is best known as a regular presenter at local, state and national Tax Institute conferences. And I have indeed sat through many of his sessions over the years. Paul, welcome to TaxVibe and particularly during this week of The Tax Summit.

 

Paul Hockridge:

Thanks very much, Robyn.

 

Robyn Jacobson:

Great to have you with us. And look, firstly, this is a big week for the Tax Institute. We of course had our very large face to face event in Sydney in March, 2020. And we've had to pivot to a virtual conference this time round, but you are one of more than 100 speakers at this week's event, The Tax Summit - Challenge Accepted. And indeed it's been a challenge for the entire profession over the past 18 months or so. So just a question before we get into our discussion today on trusts and unpaid present entitlements. As we're emerging from this COVID experience and it has been a challenging year for everyone, how important is it do you think for practitioners to reconnect with peers?

 

Paul Hockridge:

From my perspective, Robyn, really, really important. It's always been important having things like state and national conventions where we get together and we challenge ideas. We don't fall into that group think approach that we can sometimes have in our own firms. So that sort of exchange, that interplay, that testing and pRobyng and stimulation's been really important. But I must say since lockdown and particularly those who are in Melbourne have been locked down for such a long time, not having people across the desk, across the partition, who we can bounce things off, where we hear what's going on in the background, those other exchanges, because we've been missing those, this opportunity to reconnect right now couldn't have come at a better time.

 

Robyn Jacobson:

Look, it's wonderful and I do hope that next year we get into properly face to face events again, but having this virtual experience, it's really been marvelous this week, to be able to see what's possible and let technology work for us. So today we're having a chat about unpaid present entitlements or UPEs. Now some of us have lived and breathed this journey for many years now, but for the uninitiated, what is a UPE and why are we even talking about this?

 

Paul Hockridge:

Okay, well, let me start with, first of all, why we're talking about it, first of all, UPEs, which I'll explain in a second, come up predominantly, but not exclusively under Division 7A, the deemed dividend rules, and there are real live hot topic issue. And as you might be aware from other exchanges we've had along the way, litigation support is one of my niches and I'm doing yet another matter at the moment where a practitioner is being sued in relation to his firm's handling of a Division 7A matter. And this is not the first litigation support job I've had in this area. So are UPEs important? Absolutely. So then to go to your question as to how they arise, perhaps the simplest way to describe a UPE is an obligation that a trustee has to pay an amount to a beneficiary of a trust or flip that on its head and it's the entitlement that a beneficiary has against the trustee of the trust to pay them an amount.

 

Robyn Jacobson:

So when a trustee has all the income derived for the year, they of course distribute it out to the beneficiaries every year, otherwise, they caught top rate of tax on the retained amounts.

 

Paul Hockridge:

Yes.

 

Robyn Jacobson:

But ordinarily wouldn't the cash follow those amounts?

 

Paul Hockridge:

If only life was so simple. And frankly, even if it did, it would almost never flow on the 30th of June. So if we've got the Jacobson family trust, and let's say it's a trading trust, so you won't really know what the profit of the trust is until well after year end, because it takes a while to close off the books. But on or before 30th of June, Robyn is the sole trustee of the Jacobson family trust is going to resolve to distribute income. Let's say you resolve to distribute 50% to your partner and the rest equally between your adult children. That might be an effective resolution because you've done it on a percentage basis, but you don't know what the cash entitlement is because that won't be resolved until later. And even if you did, the cash might not be there because the cash might be tied up in the business.

 

Paul Hockridge:

So we might resolve to distribute income on or before 30th of June that the actual distribution, the passing of the cash, or in the terms of some deeds, the paying, the applying, the setting aside, that might happen a little later. So let's check the deed, but let's anticipate that we won't necessarily know what the cash entitlement is. And even if we do the cash might not be readily available. So if there's an unpaid entitlement at the year end, that's a UPE, an unpaid present entitlement. So that's what I'd call normal, that's what normally arises for an awful lot of trusts.

 

Robyn Jacobson:

And what you've done there is highlight the fundamental difference between a company and a trust in terms of how it's taxed, because a company of course makes its profit. And you may not necessarily know that by June 30 either, but you can work it out post year end and whatever it is, it's subject to tax at the corporate rate. Whereas if a trust took that approach, it wouldn't get the corporate rate, it'd be taxed at 47%.

 

Paul Hockridge:

Yes, correct.

 

Robyn Jacobson:

And that is why we need to distribute every year.

 

Paul Hockridge:

Yeah. And so I think two important takeaways there are, first of all, let's make sure that we resolve on or before 30th of June to distribute the "income of the trust". And I'll just put inverted commas around what the "income of the trust" might be. And then secondly, after we resolve, or sorry in the process of resolving, we should read the deed to see what's required. Because I mentioned before about this concept of paying, applying, set aside, that might be what the trust deed requires in relation to a distribution resolution. If so, that's likely to be a defined term. So to really two important takeaways, please resolve on it before 30th of June, second, please read the deed to see what it requires for an effective resolution.

 

Robyn Jacobson:

Paul, I'm sure if we continue talking for the rest of the day, at least every half an hour, you would keep saying, read the deed. And every trust session I've ever been to, the advice is read the deed. It's one of those golden nuggets that you, there's no escaping it, is there?

 

Paul Hockridge:

No, it isn't. And what I would say, because this is predominantly an issue for the accountants, and I can say this being an accountant and a lawyer, an awful lot of accountants are intimidated by the idea of reading a deed. And the message I'd pass on there is please don't be intimidated. Most often, they're just not that hard to read. Very, very often they lean themself to a plain reading. Now life isn't always that simple, but a lot of the time it is. So please, message for the accountants, particularly the younger accountants who often come to me feeling a bit intimidated, please don't. If you got through university, there's an extremely high probability you are quite capable of reading and understanding what the deed says.

 

Robyn Jacobson:

I'm really interested in your insights as to what the landscape currently looks like with Div 7A, UPEs, this concept of [sub-trust 00:09:18]. But before I throw to you again, I just want to set the scene and provide a bit of context for our listeners. Div 7A was introduced of course, in 1997. And I remember all those years ago, I was in practice at the time and we all thought, gosh, this can't happen. And it actually did. And overnight loans that had been made by companies to shareholders really had to be dealt with. They couldn't just be ignored and people continuing to strip these funds out of their company's tax free. But we're 24 years on, and I had a look recently at the extent of amendments that we've had to make provisions in that 24-year period.

 

Robyn Jacobson:

Now I'm ignoring bills sort of basically withdrawn particular things. But if we focus on the bills that have inserted or amended the law, I counted 23 different bills that have been enacted, that have made changes to Div 7A in 24 years. That's about one a year every year. And just by a nice piece of symmetry, we currently have 23 ATO rulings or practice statements or practical compliance guidelines. So 23 bills, 23 bits of ATO guidance, does that tell us that this is an incredibly complex area?

 

Paul Hockridge:

It should. And in fact with those 23 ATO pronouncements, the fact that we need 23 ATO pronouncements on top of legislation is horrifying. So when I'm working on a matter later today, this litigation support job, some poor accountant, I'll describe the group as, going through the main, what I call the main recent ruling, dealing with sub-trusts and UPEs, that is [inaudible 00:10:57] 2010/3, and the practice statement PS LA 2010/4. And then there's the PCG, the practical compliance guideline on sub-trusts. The three of those alone are 98 pages long. So there's all the others you mentioned, but just three of the 23, you mentioned, are 98 pages. Now you don't get 98 pages of stuff from the tax office, unless it's important and unless it's complicated. So from my point of view, I'm horrified that this far down the track, we are still living in a world where Division 7A is so important, so complex and people are regularly getting it wrong. So-

 

Robyn Jacobson:

[crosstalk 00:11:45] understandings this many years on of what I would call the basics or the fundamentals and it's no criticism that the profession, that's a reflection of the complexity of the law.

 

Paul Hockridge:

I think we're at the stage really where we do need root and branch reform of Division 7A.

 

Robyn Jacobson:

There's been talk for now nine and a half years of reforming Division 7A and bringing in some new rules. We haven't actually ever seen draft legislation. The closest we've got was the discussion paper released by treasury back in 2018. But in terms of, should we be wishing for these reforms to come in? Because we could be wishing for something that we actually don't like when we see it.

 

Paul Hockridge:

Without me crossing the boundaries of confidentiality, because I have been involved in confidential discussions on reform with the government, my sense in that time is the government, because there's various stakeholders from the government, were taking an open-minded intelligent collaborative approach to resolving a number of these issues. So am I fearful of change or [inaudible 00:12:49]? No, my sense is we would be likely to see an improvement.

 

Robyn Jacobson:

And we can only hope for that. I don't want to keep seeing the series of [inaudible 00:12:58] where it just seems to be getting heavier and heavier under the weight of these amendments that keep being made to the provisions.

 

Paul Hockridge:

Exactly.

 

Robyn Jacobson:

So at a practical level, when you've got, in some case, in very large numbers of structures, I came across a group years ago that had about nine different trusts involved, sub-trusts, unit trusts, discretionary trusts, and sitting underneath it all was one company, one corporate beneficiary and all these Div 7A issues existed because of this one company sitting underneath. I used to describe it a bit like an upturned umbrella. So you've got the company sitting at the point that's on the ground and the rest of the volume of the umbrella is this bunch of trusts, which were way down with compliance and management because of the exposure to Div 7A. So how's the best way for people to manage these sorts of things? So that's probably on the larger side of a typical SME group. You might only have one or two entities, how would you get people to manage that?

 

Paul Hockridge:

Okay, first I would start with, do we have a company that has made a loan or if we don't have a company that's made a loan, do we have a company that is owed a UPE by a trust? If the answer is yes to either those questions really, we then have to look where the funds have flowed within group or out of the group, because funds flows within the group that are other than company to company could well be caught by Division 7A as could transfer the funds outside the group. So like I said, I would start with, if I've got a corporate beneficiary, has it made a loan or is it owed money by a trust and has that trust made a loan? If the answer to either question is yes, that's when I start pulling out what little hair I have left, because I think I'm going to have quite the time ahead of me.

 

Robyn Jacobson:

And the interaction of different layers of trust. If we start looking at say, a UPE, from one trust to another trust, and then from that trust down to a company, and then we start making loans out the top trust, yes, there are rules to deal with that as well. And there are so many different quarantining dates, grandfathering dates when different rules came in.

 

Paul Hockridge:

Yeah. And I'll deal with some of these and the flowing through different entities in my paper for The Tax Summit.

 

Robyn Jacobson:

Very good. So if people wanted to listen to more detail, they can tune in there.

 

Paul Hockridge:

That's it.

 

Robyn Jacobson:

We talked a moment ago about the flow of money. So in other words, a distribution out of a trust is one thing, but the actual physical flow of the cash is another and they don't always float at the same place. So I want to now bring into this discussion, the provision called 100A. Now some will be very familiar with this, others may not have even have come across it in practice, can you explain again, for the uninitiated, what is it, should we be worried about it and why is it really just being talked about now and it's been around since 1978?

 

Paul Hockridge:

Sure. Section 100A is often referred to by the heading of those rules, which are the reimbursement agreement rules. And that's really unhelpful because in most situations it's got nothing to do with reimbursements. So I would turn the title around and ask whether someone other than the purported beneficiary has benefited under the trust. So again, if the Jacobson family trust decides to distribute to Robyn, but the cash doesn't go to Robyn, someone else is benefiting from that cash or from the trust assets, that's when I say, gee, maybe 100A will apply because someone other than Robyn who is the purported beneficiary, you are the beneficiary who's named in the distribution resolution, if someone else got the cash, not you or someone else got a benefit rather than you, that's when the alarm bells go off and we need to look a bit further. So you mentioned before these came in since about 1978, I think it was, and now we're dealing then with trust splitting amongst others. So trust splitting, dealing with trust stripping, but they obviously apply much more broadly than that.

 

Robyn Jacobson:

If we look at the case law that we've seen over the years where the [inaudible 00:17:11] used it effectively. And I think of cases like [Idol Kroft 00:17:16] and [Ralph Lindon 00:17:18] and similar, these were quite blatant cases egregious even, and arguably the commissioner could have used potentially the trust loss provisions or the general anti-avoidance rule part iVA, but ultimately went with 100A and successfully prosecuted those cases through the tax system. We've had very few 100A cases in a more generic or [inaudible 00:17:41] type situation. Is there a reason for that?

 

Paul Hockridge:

I suspect that one of the reasons for that is the existence of this broad anti-avoidance rule has caused people not to enter into transactions, which might well be caught, which is really an indicator of a very effective anti-avoidance rule when you don't have to apply it because it scares people away. So to give you a simple example of when this might have applied, if I had my daughters still at MLC, where they went to school, if instead of me paying school fees for both of my daughters, the Hockridge family trust may have an income distribution to MLC and MLC is an income tax exempt entity, so wouldn't matter so much why or from whom there was a deposit into the MLC account, as long as there's enough there to cover of my daughter's school fees. In that situation say, well, MLC is the beneficiary of the trust.

 

Paul Hockridge:

Let's say it's an eligible beneficiary of the Hockridge family trust, did someone other than MLC, the purported beneficiary benefit under this arrangement? And the answer is too right. Paul did, because Paul didn't get a bill for the school fees. So as effectively paying for the school fees out of pre-tax money by distributing to MLC. Now, because someone other than the purported beneficiary, MLC benefited, that is, Paul being the person who didn't get the bill for the school fees, in my view, 100A would've applied. The same sort of principal would apply if I tried paying an old folk's home, a retirement village for looking after my mother or my father. So the fact that people became aware that those sort of arrangements would be caught by 100A perhaps encouraged people not to try such things, which is a mark of the effectiveness of the provision. That's not to say all the issues are resolved, but I suspect that that's one of the reasons we haven't seen its widespread application.

 

Robyn Jacobson:

Let's put a couple of other scenarios to you and you comment on whether you think 100A could apply. You talked about where the cash is potentially retained by the trust. So let's say my trust is running a business and it distributes to me that the UPE rises because the trustee retains the use of the cash so it can run the business working capital, UPE exists. Now I'm still technically accessible on the distribution, but could 100A happen because I'm not getting the use of the cash the trustee is?

 

Paul Hockridge:

Yeah, that's one of the really big, important questions that we are hopeful that the tax office will address in its ruling, which the ATO has promised us early next year. And because this sort of issue that you are referring to is so incredibly common because as we said at the outset, very often, the cash behind the distributions, the cash design to fund the distributions is tied up in working capital in the business activities. So we're expecting a ruling from the ATO early next year. The ATO tells us that active compliance resources are not to be devoted to the application of 100A in the ordinary course of events prior to the 2021 financial year. So from 1st of July '21, then we can expect the commission of application of 100A to be put on the front burner, so to speak. We might have a little bit of safe harbor in relation to pre one July '21, but that's assuming that the act haven't been particularly egregious.

 

Paul Hockridge:

So to go to your point, which is probably the most live of all of the 100A issues, let's see what the commissioner comes up with. My crystal ball says I would be absolutely amazed if the commissioner sought to apply 100A in that situation without a change in legislation, simply because of the practical difficulties of determining in what circumstances it would be reasonable to expect a trustee to be able to access cash, but only time will tell. So let's keep our fingers crossed and our eyes peeled for early in the new year for this ruling.

 

Robyn Jacobson:

Indeed. But guidances on that is going to be so crucial for these common type transactions.

 

Paul Hockridge:

Absolutely, absolutely.

 

Robyn Jacobson:

[crosstalk 00:22:05] one I want to explain. What if we have a trust carrying on a business, distributes to a company, a corporate beneficiary, the amount is left unpaid. Now, if the trustee uses the funds, we know already that that is a potential Div 7A issue, and they'll either be a loan or the UPE would be treated as a loan, anyway. We know that if the funds are linked out to say an individual, who's an associate of that company, we definitely already have a problem under the legislative provisions of Div 7A. So in other words, Div 7A seems to neatly deal with all of that. But let's put a 100A lens over the top of it, have we got potential exposure there and bearing in mind that Div 7A is a consequence for ultimately the person who uses the funds, whereas 100A is a consequence for the trustee.

 

Paul Hockridge:

Yeah, good point. You might recall, Robyn, that when you get to the back of Division 7A, there are the anti-overlap rules. So we run through with loans, with payments and debt forgiveness, and we say, here's what fringe benefits tax applies to, here's what Division 7A applies to. And then in the commissioner's rulings, he then tells what happens if you've got a UPE that's deemed to be a loan, which set of rules do you apply, [subdivision AA 00:23:23], or what are called the main Division 7? The issue we're rising now is, well, gee, what if it's a different part of the act applies, a different part of [inaudible 00:23:32] act applies, we need a primacy rule.

 

Paul Hockridge:

We need a rule that says, in the following circumstances, here's the rule we apply because the commissioner won't seek to tax the same amount twice, even to different tax payers, but we really do need legislative guidance, we need a clear statement, just like we find at the end of Division 7A in relation to, is it FBT or is it Division 7A, we do need that clear rule saying who's going to have to pay in these circumstances.

 

Robyn Jacobson:

I do hope that is clearly set out in the draft ruling and then ultimately the final ruling, I am thinking back to some issue, a guidance a number of years ago, where it was no more than a fact sheet. It wasn't binding on the commissioner, but it gave us a sense of what the commissioner was thinking on 100A, and I remember it did allude to the idea that there could be a Div 7A loan that is being with a seven or 25 years, but still 100A potentially could apply if you like over the top of it. So I agree that distinction between the two and understanding like a delineation is really important.

 

Robyn Jacobson:

One more issue with 100A as we wait for this ruling, there is an exception built into the provision dealing with what's called an ordinary family or commercial dealing. And it's one of these gems that everybody loves to draw upon, everybody thinks they have an ordinary family or commercial dealing, but it's ultimately not really ever been defined, we haven't got judicial clarification from the courts. And that's why this ruling again, is going to be so important to provide some guidance on that. But if we have a dealing that is common, does the fact that it's common make it an ordinary family and commercial dealing?

 

Paul Hockridge:

In my view, no. And I very rarely give binary type answers, but I think the answer there's got to be no. And the reason I say no is the golf club approach where everybody down at the golf club, at tennis club does it. So it must be okay, doesn't make it right, it doesn't make it the correct interpretation. And simply as a matter of public policy, I can't imagine a court saying that widespread inappropriate behavior is so common that it must be okay. And that's-

 

Robyn Jacobson:

Do you remember [crosstalk 00:25:47] for the speed limit, it was someone was saying driving past a 60 speed zone sign, well, the traffic was doing 80, it's the same sort of thing.

 

Paul Hockridge:

Yeah. So do I think as a matter of public policy, the law would be interpreted that way? No, I don't.

 

Robyn Jacobson:

Look, it Will be interesting to see when this ruling is finally [inaudible 00:26:04] in a draft form. My view, I suspect the profession's not going to be thrilled when they see it, but I have no insights, I haven't seen a draft, and it'll be very interesting when it does come out.

 

Paul Hockridge:

Yes. My fear is that trying to define an ordinary family or commercial dealing, which is where that carve out is, is likely to [inaudible 00:26:25] as easy and straightforward as explaining what income according into ordinary concepts are, or when [8/1 00:26:30] will apply to a loss or outgoing occurred in producing income where a negative limb doesn't apply. We really are being asked to split the baby in half.

 

Robyn Jacobson:

We shall see. Now in your paper, you talk about a concept in terms of a estate planning called the angel of death. So can you please explain what you mean by this?

 

Paul Hockridge:

Sure, sure. By way of background, a lot of us have very wealthy clients with corporate beneficiaries and there can be some big chunks of change sitting in those corporate beneficiaries. So companies pregnant with retained earnings, commonly with the ability to fully frank those dividends, commonly those corporate beneficiaries are owned by the trustee of a discretionary trust. And that's been the case while the wealth has been accumulating for asset protection reasons. And then as mom or dad start to get on in years, we think, gee, that's a really unfortunate structure because we can pass control of the family discretionary trust that owns the shares and we can distribute dividend out through the trust in years to come.

 

Paul Hockridge:

That's doable, but it's not terribly tax efficient. What we would much rather is have this wealth, that's sitting in the corporate beneficiary, as an asset of mom or dad when they pass. Because then it can form an asset of their estate and it can be dealt with under a testamentary trust. And by testamentary trust, I mean, a trust created under the will of the deceased. It comes into existence under the will, only on the passing of the [crosstalk 00:28:09].

 

Robyn Jacobson:

Because of course, if they don't hold the shares upon their death and the family trust does, it remains outside the estate.

 

Paul Hockridge:

Correct. So estate plan is sometimes draw a line down the page and on one side they put the estate assets, they're the things that mom and dad own. And then there's the non-estate assets and discretionary trusts and indeed she's in companies owned by discretionary trust, then non-estate assets. So then we're saying, gee, there's, let's say $10 million dollars in a corporate beneficiary owned by the trustee of a family discretionary trust, that's a non-estate asset. I would really love it to be an estate asset so it can form part of the corpus of a testamentary trust. Why? Well, the answer there is we can make distributions of income out of testamentary trusts to minors without having the penalty rates of tax apply. And if that distribution is a fully franked dividend say, paid to mom or dad to apply for the benefit of their children to pay school fees and the like, with current tax rates, we could distribute in the region of $100,000 without having any catch up tax payable.

 

Paul Hockridge:

So when we think, let's say it's Robyn now, and Robyn's kids are just finishing school. So this doesn't sound particularly attractive, because there's no grandchildren. On the other hand, we're thinking, well, hang on this estate planning structure, this might be in place for a long time before anyone passes. So we might be talking about potentially income distribution of dividend income, not just of you and of your children, but of your grandchildren, of your great-grandchildren. So we could be looking a long way in the future from a, in estate planning perspective. So then we say, well, how do we get this wealth out of this corporate beneficiary up to mom and dad and how do we do it only very shortly before they pass away? Because if we do it now and [inaudible 00:30:08] pass away for 20 years, we don't have asset protection and we don't have income and capital distribution flexibility for the next 20 years. And here's where the angel of death comes in.

 

Paul Hockridge:

So let's just say the [inaudible 00:30:21] is your mom. She's been a successful professional woman all her life, she's accumulated enormous wealth in a corporate beneficiary owned by the trustee of a discretionary trust. After discussions with Robyn, with all Robyn has been learning over the years and all her years in tax, it's agreed that you will take over as replacement director of the corporate beneficiary as replacement director, let's say sole director of the trustee of the family trust that owns the shares. And let's assume that then shortly before you're, sorry, I should mention this one other thing to do. We'll create a company now, it's owned by your mom and it will just sit there until a required time. Maybe for years and years and years, it'll just sit there owned by your mom, $10 cashier bank, $10 paid up capital.

 

Paul Hockridge:

So then there's your mom in [Peter Mac 00:31:18], the lymphomas flared up. She's not going to last very much longer. The trigger for you to replace her as a director of both the corporate beneficiary and the trustee of the family trust, those triggers have happened so you step in as a director, because you've planned in advance. You haven't made a decision, because that would be inappropriate, but you have prepared documentation declaring a dividend of 10 million dollars fully franked out of the corporate beneficiary. And you had turned your mind to what would happen if that happened and the trustee of the discretionary trust [inaudible 00:31:54], it's probably a good idea if I distribute this 10 million fully franked dividend to mom's company, the one that she set up all those years ago.

 

Paul Hockridge:

Now, again, you're not going to resolve ahead of time to distribute that fully franked dividend, because that would be in breach of your trustees duties because you should only make such a decision at the time, having regard to all of the facts and circumstances at the time. But shortly before your mom passes, what might have been happened is, a dividend has flowed from the corporate beneficiary, through the family trust to the company owned by your mom and suddenly your mom's estate is worth 10 million dollars more and in years to come, particularly around school fees time at 35 up $1,000 of pop for the kids in senior years, assuming that that they're not boarding.

 

Paul Hockridge:

And let alone any other costs, the trustee of the testamentary trust might have a word to the director of the company and director of the company might declare a fully franked dividend to the trustee of the testamentary trust to trustee of the testamentary trust might say, Robyn, here's some money, please apply it for the care of your children who are the beneficiaries. And suddenly we start draining money out of what's effectively a corporate beneficiary with no catch up tax. So...

 

Robyn Jacobson:

[crosstalk 00:33:16] we shift to the wealth across just prior to death?

 

Paul Hockridge:

Correct. And so the angel of death, you are the angel of death. You are there to try and protect some of the family wealth for the benefit of future generations.

 

Robyn Jacobson:

So it's going to be applicable in so many cases where there's significant wealth and where this can all be planned out and it's interesting look at how state planning can be very effective. So but what I'm also thinking through that, I've often spoken about this in the context of deceased estates and similar matters, but there's always that difference between the hospital bed and the proverbial [inaudible 00:33:54].

 

Paul Hockridge:

Mm-hmm (affirmative), yes. That's right.

 

Robyn Jacobson:

And this of course is assuming that you know in advance and can make the necessary arrangements.

 

Paul Hockridge:

Yes. So one of the comments I make in my paper is, do I think 100A, the reimbursement agreement rules, should apply [inaudible 00:34:09] general anti-avoidance rules? No, and no. But it'll also raise your point that does this help us in the event of unexpected death? So if someone dies too soon, heck we did our best, but we've just missed out. But having said that doesn't mean we should do nothing just because there's no guarantee of success 100% of the time. I suggest no. I think we should do the best with what we've got. As a minimum, we should raise with our clients, these alternatives, the prospects of the potentially really big savings.

 

Paul Hockridge:

If it doesn't work out, hopefully we'll explain to our clients the fact that these things aren't absolutely foolproof, that mom could pass a little too soon or she could have a heart attack, and it was just too soon, but sometimes our clients appreciate us raising options, raising choices. And are we likely to have to tweak every one of these arrangements sort of facts and circumstances in each case? Absolutely, absolutely. And one of the big ones going to be, who's going to be the angel of death? Is it going to be Robyn or Robyn and her sister? Or-

 

Robyn Jacobson:

And what if something happens to that angel of death along the Way?

 

Paul Hockridge:

Yeah. And what should happen when people get married and those sort of issues. So are there lots of important details? Absolutely. But the reason for including this in the paper was to take us a little bit away from some of the pure compliance, raise a broader structural issue, which might help and have some longer standing effect because it really is dealing with intergenerational wealth transfer.

 

Robyn Jacobson:

Paul, thank you. And I think those comments at a broader level, just typify the challenge that any tax advisor has, you can only give advice based on what you know at the time and whether that's the stage of the tax law or the physical state of the family or the state of someone's mind, there are so much that can change. There is no guarantee. We do talk about death and taxes being where the only two things that are guaranteed, but I think that's a really interesting take on how planning can be done when it comes to estates. So I thank you.

 

Paul Hockridge:

My pleasure.

 

Robyn Jacobson:

Also, interesting to recap on where we're at with UPEs and [inaudible 00:36:17] 100A ruling, which, yes, we hope to see early next year. It has of course been deferred a number of times. So thank you again, Paul.

 

Paul Hockridge:

My pleasure. Thanks Robyn.

 

Robyn Jacobson:

Thank you for listening to this episode of TaxVibe. I've been chatting with Paul Hockridge, principal at Hockridge Advisory Proprietary Limited. 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 on social media, follow the Tax Institute on LinkedIn, Facebook, Instagram and Twitter, you can join the conversation on our member only community forum at community.taxinstitute.com.au. Not a member of the Tax Institute? Join a collective voice of 15,000 practitioners at the heart of the profession and find out what the best tax professionals have in common. Join today and enjoy 14 months membership for the price of 12. For more information, visit taxinstitute.com.au/membership. You can also contact us by emailing taxvibe@taxinstitute.com.au. We look forward to you joining us next time. 

Episode 12 — Walking the tax dispute pathway

Release date: 14 Oct 2021

In this episode of TaxVibe, Robyn chats with Jerome Tse, Partner, King & Wood Mallesons and current Vice President of The Tax Institute, and Scott Treatt, CTA, General Manager, Tax Policy and Advocacy, at The Tax Institute about the pathways available in resolving tax disputes. 

 

Host: Robyn Jacobson, CTA, The Tax Institute

Guests: Jerome Tse, CTA. King & Wood Mallesons and Scott Treatt, CTA, The Tax Institute

 

 

 

 

Robyn Jacobson:

Hello and welcome to TaxVibe, a podcast by the 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 here every day. We hope you enjoy this episode of TaxVibe.

 

Robyn Jacobson:

I'm joined by Scott Treatt, general manager tax policy and advocacy at The Tax Institute. Scott is a chartered tax advisor and has been practicing as a tax specialist since 1997, gaining his experience in large second tier and Big Four accounting firms, as well as government. Over the years, he's been engaged on direct and indirect tax issues pertaining to individuals, startups, small businesses, private groups, and multinationals, addressing issues including but certainly not limited to, asset, business, and entity transactions and disposals, insolvencies, structuring, succession, and disputes within family groups, as well as with the ATO. Scott has a passion for our tax system and tax education, continuously seeking to find opportunities to improve the efficiency and effectiveness of both. He's a regular presenter at industry events and had been a lecturer for some 12 years in The Tax Institute's structured education programs. Scott joined The Tax Institute in November, 2020.

 

Robyn Jacobson:

I'm also joined by Jerome Tse, CTA, who is a partner at King & Wood Mallesons, specializing in taxation disputes and litigation. Jerome is also the firm's global transfer pricing coordinator. Jerome is an experienced practitioner and has been involved in a number of Australia's recent high profile tax cases. He's currently the vice president of The Tax Institute. Jerome and Scott, welcome to you both and great to have you on TaxVibe.

 

Scott Treatt:

Thanks, Robyn. Great to be here.

 

Jerome Tse:

Thank you.

 

Robyn Jacobson:

We don't often have three of us on the air at the same time, but this will be a really interesting discussion and today we're going to have a chat about dispute resolution, and I think what will be useful for us it to set the scene. Why are we even having this conversation? And then I'm interested to get your thoughts and insights as to what does it look like when someone is on the pathway of resolving a dispute with the ATO? I think it's useful to point out that we'll be covering both the SME market, as well as the corporate market. So, disputes do remain a big part of the tax system. Jerome, why is this?

 

Jerome Tse:

Well, Robyn, I think everyone knows the age old saying, there's nothing certain but death and taxes. I think that's particularly accurate when you're talking about tax disputes and tax controversy. If you're looking in the Australian context, our tax laws run over thousands of pages. You then add the double tax treaties to it, you add the ATO guidance to it, the legislation, the EMs, and then all our case law, and you invariably with have a tax system that is complex and open to different interpretations.

 

Jerome Tse:

Tax disputes I think in that context are here to stay. Even during the pandemic, if you look at what's happened in the last 18 months in Australia, we've been quite fortunate to not weather the pandemic as badly as some other countries. Tax disputes didn't go away. Gratefully the ATO offered many taxpayers to pause compliance action over the course of 2020, to allow businesses to really deal with keeping themselves afloat, keeping staff employed, and really just looking after their own wellbeing, economically and mentally.

 

Jerome Tse:

I think that was a great initiative by the ATO. It was optional, so some taxpayers said, "Look, I'm happy to keep going." But others said, "Yes, please. I need to deal with JobKeeper," all the other job ones. Robyn, you know those better than me. Pause is coming off now, Sydney's coming out of lockdown Monday, and the rest of Australia won't be too far behind.

 

Robyn Jacobson:

Jerome, does that mean that all bets are off? If we're recovering and starting to emerge from COVID, where does this leave taxpayers moving into 2022 regarding disputes?

 

Jerome Tse:

All bets are off in a sense. I think audit activity will start again, if it hasn't already started. It will pick up. But the ATO has said publicly also that if you're still struggling, please go and talk to them. They would like their lodgments up-to-date, but if you've got other issues, come and talk to them and see how they can help manage the process. Again, I think they're being a bit more bespoke in how they deal with disputes and other audit activity. But it is coming off now. I can almost see bottleneck is just like a bottle of soft drink shaken a little bit. It's about to burst. We might see the next 18 months, Robyn, might be an uptick in audit activity.

 

Robyn Jacobson:

Scott, we talk about living with COVID. Do we also need to live with tax disputes?

 

Scott Treatt:

Of course. I mean, tax disputes have been here for a long time. That's why I love tax. Everyone's got a difference of opinion. I get 10 tax practitioners in a room and you've got 10 different opinions. So, disputes have always been here and they always will. What we've got to focus on is the process and efficiency in that process, and what have you. I just wanted to pick up on something Jerome just said there too, around what is living with COVID in tax mean? I think a piece of that too, is transparency, and that is ensuring you keep your lodgements up-to-date. Some people might be holding off on getting lodgments in and what have you, for fear of a dispute or for fear of not being able to pay or what have you.

 

Scott Treatt:

But I think it's crucial that piece, of ensuring lodgements stay up-to-date but then as Jerome says, stay in communication with the ATO. That's what they keep saying. Talk to us. Talk to us through this time at the moment, so that we know what you're going through, so we can work with you in relation to it. I think they're living by it. I just wanted to at least tie that off. But looking at disputes too, this has been a topic that's been recently covered in our TaxVine on the preambles. We had Chris Kinsella do a two-part series just recently, and I thought it was excellent.

 

Scott Treatt:

I thought it was good to cover off on those questions of when do you settle and when do you litigate? Looking at issues of what your technical position is, who's got the onus of proof, what's the cost? What is the cost? Like, that's a significant part of this and I think it can't be overlooked. There is a large cost that can be associated with disputes and I think that's the piece that we should explore as we go through, is there is a large cost on a portion of taxpayers to exercise rights that are coming their way.

 

Scott Treatt:

I know IGOT's been looking at this. Inspector General's been, or shortly, to release their review on the communication of taxpayer right, and in that report itself it looks at how well the ATO is communicating rights of taxpayers to not just their part 4C rights, but just their other rights to complain and seek out other forms of resolution for the issues they're having.

 

Robyn Jacobson:

I spoke with the Inspector General of Taxation and Taxation Ombudsman Karen Payne just yesterday and she did indicate to us that yes, we're going to be releasing this report, this investigation on the 14th of October. We do look forward to its public release. But what she did share is they've already got up on their website, and anyone is welcome to go and look at this, some survey results following some recent questions that were put to taxpayers. I just want to share some of those results with you because I think they're quite insightful and really set the scene for the discussion that we're going to continue to have.

 

Robyn Jacobson:

So, one of the questions was when a taxpayer was asked how important is the effective communication of taxpayers' rights, 96% of respondents said it was important or very important. This is clearly something that is of value and important to taxpayers. 72% thought the part C rights, which is the right to lodge an objection, are well communicated, but these are the formal objection rights. Most people are aware that if they don't agree with an ATO decision, they can object. But there is less communication or it is communicated less well when it comes to the administrative or informal rights. So, there's a lower awareness of rights that go beyond those relating to objections, and there's certainly room for improvement for the ATO to better communicate those rights to taxpayers.

 

Robyn Jacobson:

In other words, what are their options and what are their pathways? And just to pass on some of the quotes that these respondents provided the Inspector General, taxpayers should be made aware of their rights if they disagree with a decision made by the ATO, and should feel confident that there is information available to support them to have a decision made by the ATO reviewed. I think this one's really important. Taxpayers have a right to be fully informed about all review and appeal options. A variation of this, all taxpayers should be made aware that they have rights to take a decision further. If you're unaware of the processes, you cannot act.

 

Robyn Jacobson:

The ATO needs to be consistent with how they communicate outcomes. There are quite some recurring themes in that feedback, and I'm interested, Scott, if I can come back to you, when we finally do see the release of this report publicly, it's going to be interesting to see of course, how it's received by the taxpayer population and by the profession. But what do you think are going to be the implications of this report?

 

Scott Treatt:

I think there needs to be, and I'd be interested to read the report once it is released and that of the ATO's response to the report, but looking at correspondence in general would be I guess a logical piece around what is communicated around rights and the avenues that taxpayers can go through? But there's a more broad issue, and this is probably the next debate that's had, and that is an understanding of once you know what your rights are, how do you exercise them? How do you best communicate? And Jerome, a lot of your work is in the area of disputes and it is nuanced, the way in which you approach a dispute, the way in which you lodge your objection, how you formulate your arguments and get that to position yourself well through the disputes process. Do you have some insight in that regard which would be beneficial to our listeners?

 

Jerome Tse:

I might start, Scott, just with Robyn's comments on the IGOT survey results and what's on the website. And I found it quite interesting that only 72% thought that their part 4C rights were well communicated. I think that's surprising. In the corporate market I think that would be much higher and that might mean that there should be a focus, or there could be a better focus on the small business market or the individual market of who may be less informed on their rights.

 

Jerome Tse:

Certainly I think informal administrative rights are less well known than the formal part 4C rights. There are other rights that I think people shouldn't forget about. Freedom of information, that's always a good way to get a little bit more information from the ATO about your own affairs. Then there are formal judicial review rights that if you get down that route, they are very important, as well. But looking at how you run a dispute, Scott, I think you're right, there's a lot of strategy there to think about.

 

Jerome Tse:

What do you put in your objection? What do you not press? When do you do it? When do you engage for settlement? When do you litigate? I remember probably five or six years ago, I was in Adelaide with Debbie Hastings who used to be the Deputy Commissioner of Review and Dispute Resolution. We were sitting down having a coffee before getting on, doing a joint presentation, and she said to me there are only four instances really where the ATO won't be keen to settle. One is when the taxpayer itself doesn't want to settle, so you can't settle. You need two to play tango.

 

Jerome Tse:

The second is if there's a point of law that really requires clarity. Law clarification is one part of what the system needs. The third is if the ATO needs to send a signal to the market. Whether it be by way of punishment or otherwise. And the last one I think is where I usually get to, if I go to court, and we always try not to go to court, not to litigate. If the parties have tried and tried and tried to reach a settlement and we just can't, then we go off to court knowing that we've tried to do so. I think there's enough nuance and strategy in how you run a dispute, but it shouldn't be to get to the litigation end. It is to find ways to get off that highway to try and find ways to resolve the dispute. I think that's the trick to advising taxpayers.

 

Scott Treatt:

That's right. And part of that is understanding where is the highway? What is the highway you're driving along? Because what we operate in is a self-assessment system. The highway which you're referring to Jerome, is that whole end to end process. It's that piece from you're lodging, you're getting an assessment raised. From that point of time, there could be a compliance review or an audit which comes through. You might through that process, it could be self-amendments, there could be objections to outcomes from those reviews. If you even get there.

 

Scott Treatt:

You can certainly challenge the way in which the reviews or audits are taking place along the process, as you're engaging on the issues which are being raised. The ATO is generally very transparent in that audit process around the issues they're looking at and why. There's opportunity to enter discussions through that. As I said, then you've got the right to object to an amended assessment, if you get to there. You might have even gone for a private binding ruling before you've lodged your return.

 

Scott Treatt:

There's so many different avenues along this highway to which you're referring, where you can enter into dispute resolution in one way, shape, or form. And the ATO over the years has been really good at expanding their alternate dispute resolution activities. You've got in-house facilitation, independent reviews in the large market, in the small market. Small market also, or your more vulnerable taxpayers I would say, you've got the dispute assist tool and that's probably one of the less well known. Lesser known. Sorry, lesser known tools which are in the toolkit, that dispute resolution toolkit there.

 

Scott Treatt:

Then you might end up in court and you pick up on the points you're just raising around why you end up in court and why they want to push them. If there's a principle of law that they're testing, then there's test case funding. There's that whole pathway there of availing yourself to test case funding, where it is a precedential view that they're seeking to pursue. You've got the right to get in the AAT. You can be self-represented through there. But these days as well, there's a small business tribunal, right? Which exists within the AAT. That's another tool in the toolkit for small businesses in particular, where they can again, self-represent.

 

Scott Treatt:

And if that's the case, then as I understand, the ATO too effectively have to be self-represented. And if the ATO choose to get external representation, then the rules associated with the small business tribunal is that they've got to pay for your representation. There's a lot of different things to consider along that pathway of dispute resolution or that highway as you call it, Jerome.

 

Robyn Jacobson:

I want to draw on something both of you have mentioned. Jerome, you spoke about larger corporate taxpayers probably having access to people who are perhaps more familiar with the litigious side of these pathways. And Scott, you've spoken about all these different pathways that are available. Now, I think that most people would understand that if they disagreed with the ATO on an interpretation issue, they can then dispute that with the tax office. But we've got to bear in mind there is at least a quarter, if not more of the population, I'm talking individual population now, that doesn't use a tax agent.

 

Robyn Jacobson:

In other words, they're self-lodgers. So, how does that part of the taxpayer population even begin to understand the pathways that are available? And understanding that there are significant differences between someone who self-lodges using myGov, and a multinational who has access to a whole boardroom full of advisors to guide them through these pathways. Can I get a response from each of you? I'll start with Jerome.

 

Jerome Tse:

I think that goes to quality before the government. We do need to do some work about helping individuals who are using myGov or lodging their own tax returns to give them the education that they can object. And object, we use it in a very technical sense but an objection can be as much as a letter to the ATO saying, "I don't agree with your assessment. I should be able to deduct these motor vehicle expenses." That can be an objection. Whether it's maybe more plain language web guidance from the ATO, whether it's really educating through bodies like The Tax Institute where we need to be providing educational services, not just to our members but to community at large, to help them educate at this base level.

 

Jerome Tse:

I think it's really, really important because it'll be very disappointing for a taxpayer to say, "I disagree. I should have gotten that deduction. I don't know what to do. It's only a thousand dollars, $50, I'm just going to leave it." When if you or I looked at it, or Scott looked at it, it's a clear deduction. That'd just be a very disappointing outcome that shouldn't happen in the system. I don't know what you think, Scott.

 

Scott Treatt:

Yeah, it's interesting. Just reflecting on the question as Robyn asked, and we sit here as tax practitioners and we know the system. We come from a very educated point of view of knowing how the system works and what our underlying rights are, who we need to liaise and communicate with. I'm not sure that Joe Blow on the street knows that. And it's not just about communicating. If we look at Karen, the work that Karen Payne is doing, it's not just about this is your right. It is about how to avail yourself of that right.

 

Scott Treatt:

There is an element of this. I think you're right, starting there Jerome, the web guidance. How that articulates how one moves through that process. But also importantly, how a taxpayer finds that web guidance. We have all experienced searching the ATO website. I recall, distinctly recall the commissioner himself a number of years ago, "I wouldn't search on our website. I'd use Google." I think that was in a Tax Institute National Convention he made that comment one year.

 

Scott Treatt:

But that's certainly what I do. How does the general public find how to avail themselves of the right that's been communicated to them? Then the other piece, too though, is that around the vulnerable, [inaudible 00:21:30] which the tax clinics look after. I actually think the tax clinics have been doing a great job over the last few years, as well, in terms of supporting those more vulnerable clients go through this process. Not just bring their lodgements up-to-date, but also run through a dispute.

 

Scott Treatt:

There is a part of the population who may not have had the knowledge or access to process of objecting or going through a dispute, now do through these tax clinics. Yeah, there's a whole range of issues which come out of it. I think depending on what comes out of the report, and as I say, the ATO's response, I think we need to sit back and actually put ourselves in the shoes of those who aren't represented to see do they understand it?

 

Robyn Jacobson:

You've both spoken of this almost litigation highway and how there are going to be different exit ramps that you can take along the way, depending on the choices you make or perhaps choices that the ATO makes, as well. I think it might be useful just to put all this in perspective. I'm going to provide you with some broad numbers relating to the 1920 income year. The total number of returns lodged, so this is things like activity statements, tax returns, FBT returns, et cetera, is nearly 39 million returns.

 

Robyn Jacobson:

Now, of those, about 470,000, there were audits conducted that led to adjustments. Of those, we ended up with around 22,000 objections, minor amounts of settlements and independent reviews, but I want to focus on the litigation line. 375 matters went to litigation out of nearly 39 million returns. Now, of course, in that figure you're going to have some wins for the tax office and some wins for the taxpayer. But there is a minuscule proportion of taxpayers that end up in litigation. That is not to downplay the importance of litigation, and nor is it to suggest that it's not a massive impost on those who are going through it.

 

Robyn Jacobson:

But there have got to be better ways that, and it's obviously not everyone's getting to the litigation point, but we need to encourage more people. If they're going to dispute a position with the ATO, that they find an exit ramp before they get to court. Again, Jerome, can I start with you in response to that?

 

Jerome Tse:

I think those stats generally show system overall is working. To have litigation at those so low levels, out of 39 million tax returns lodged, the ATO I think is now picking, and in part it can't choose, but it is picking the right fights or better fights in litigation and what goes to court and what doesn't. I say that in part the ATO is in control, because the ATO can reach settlement prior to litigation with taxpayers. Even though taxpayers are the ones that have to push the matter into court.

 

Jerome Tse:

I'm not surprised that litigation's at the 3-400s. I don't think it's going to go up or down too much more over the next couple years. But I think it's a good sign for the Australian tax system that litigation is so low. I think it's also important to say that the pathway to litigation needs to be there to give confidence in the tax system. Sometimes you just can't settle. Sometimes, as Debbie and I were talking about years ago, you need law of clarification or you've simply tried.

 

Jerome Tse:

I think one example of that is the Chevron transfer pricing case. People tried to settle for years and years and years, but we had to get to court. What belies this number as well, I think this 375 number that we talk about, is that in the Chevron case, we got past trial, we got past the full federal court. We filed special leave and then we settled. So, sometimes you may need to litigate to reach a settlement outcome, as well, and that also I think shows you can settle at any stage of the highway, even if you started on the court process.

 

Robyn Jacobson:

Scott, I'll seek a comment from you in a moment, but just while I've still got Jerome, and I'm wondering Jerome if you can try and provide a response without the bias of being a lawyer, but see if you can do this objectively.

 

Jerome Tse:

Oh dear, oh dear.

 

Robyn Jacobson:

I'm thinking of this pathway and let's go right back to some of the earlier stages. In my discussions with lawyers over the years, there's been some fairly consistent feedback from them, that had the accountant or had the taxpayer approached them or engaged them earlier in the process, then they wouldn't have been called in at the 11th hour to fix the bigger mess that takes longer to resolve, has been escalated, and inevitably costs more. Without saying should lawyers be engaged early, because I'd of course expect you to say yes, from an objective perspective, and he has got his thumbs up as we're doing this, from an objective perspective, at what point should people engage legal advice?

 

Jerome Tse:

It is a good point. I think you can only speak in generalizations here. Because there will be good tax agents and accountants who have the requisite skillset to assist their clients. Tax disputes is a specialization in itself. So, there are nuances that we talk about with taxpayers having a burden of proof, for example, in how to approach a dispute and how to deal with the ATO.

 

Jerome Tse:

I would probably say, and it's hard for people to say you're a lawyer, you're just saying this, I'd err on the side of probably get a lawyer in the AAT. I think that while some tax agents can do well at the AAT, I think their clients may be better served by having a barrister or a solicitor helping them. In terms of earlier on in that highway, Robyn, I think when you're looking at RFIs and responses, and it's getting trickier and trickier, just having someone there to ring up, not to take over your client, but just to say, "Hey Jerome" or, "Hey someone. I'm about to give this information over to the ATO. What do you think? How should I present it? Should I give them more? They've only asked for basket A of information, but if they had basket B, it'd all be done."

 

Robyn Jacobson:

Jerome, I've had the opposite where a lawyer has been called in. I've had this numerous times and when the lawyer looked at it, too much information had been provided. And they said, "Why did you give that?" "Well, the ATO asked for it." Nah, they didn't ask for that much or that many years. So, sometimes there's a risk of providing too much in a dispute.

 

Jerome Tse:

There is, as well. I agree with that. That's where the skill and the experience comes into it, to know when to provide more and when to provide less.

 

Scott Treatt:

I agree. Absolutely agree. That's why I'd echo your comment Jerome, as well as saying of course you'd say that because you're a lawyer. Just had to, I'm sorry. And that is tax dispute resolution is a real specialty, and there is a balance. I think I think was an area I focused on in practice a number of years back, and often it was a question that wasn't being asked by the ATO that needed to be answered, to be able to resolve the dispute.

 

Scott Treatt:

It was being able to look at what are the real issues here, and look, there's the other end of this spectrum, too. There are still a number of taxpayers out there who don't trust the ATO. Therefore don't want to give them more information. Therefore actually exacerbate the problems associated with the dispute by not working with them. There's a fine balance. The earlier you can call in a specialist, need not be a lawyer but someone who is experienced in disputes, to assist with that process I think is beneficial.

 

Scott Treatt:

But certainly as you're getting towards the pointier end where some of the RFIs are getting more tricky or it is tending towards being unlikely to resolve the dispute before amended assessment or what have you, you might end up in court. Therefore, why not seek the advice of a legal practitioner at that point of time, to understand a lot of the issues that you're going to come across?

 

Robyn Jacobson:

Scott, just for our listeners, RFI?

 

Scott Treatt:

Request for information. I beg your pardon, yes.

 

Robyn Jacobson:

Yeah, good.

 

Jerome Tse:

Sorry, that was my fault, Robyn.

 

Robyn Jacobson:

No, that's all right. Just wanted to clarify so everyone understood. We're going to talk about independent reviews in a moment and also in-house facilitation, and Scott, I'm interested in your thoughts on that, but I also want to comment and get your thoughts on what the ATO calls the tax gap. They publish tax gaps in a lot of different spaces. There's a GST tax gap, and there's a superannuation guarantee tax gap, and there's one for income tax, of course. This is done by sector, and every year, and we're about to see the next lot of tap gaps with the annual report is not too far away, as it's released every year around this time.

 

Robyn Jacobson:

The '17-'18 data showed that large business, so this is essentially your large corporates or multinationals, have a 3.7% gap. In other words, the ATO is collecting around 96% of what they think they should be collecting from this sector. You'd think that they couldn't do much better than that, maybe another one or 2% with audit, but you're never going to squeeze 100% out of this particular lever.

 

Scott Treatt:

You never can, no. No market's ever going to get to 100%.

 

Robyn Jacobson:

No, you're right. That's on world stages, as well. The small business sector, the gap is significantly bigger at around 11-12% and we're yet to see what this year's figures look like. Perhaps Scott, can you comment initially on the gaps and what does this mean? Particularly in terms of disputes.

 

Scott Treatt:

General observation, you've got to look at that large market one and think wow, they're actually doing a great job. I think there's still a significant misnomer out there around large corporates paying their fair share and what's going on. I was in a senate committee hearing recently and absolutely was asked on the record, very pointed questions about the approach to the large market, but look at that gap. They're doing pretty good job at complying with their obligations.

 

Scott Treatt:

Small business gap, yeah, you could probably understand that a bit more. But that doesn't mean it's as a consequence of knowingly, not including income or knowingly overstating deductions. It's not [crosstalk 00:32:17]-

 

Robyn Jacobson:

It may not be deliberate.

 

Scott Treatt:

... at all, right? What it's saying is that there could actually be a massive education gap that's there. A lack of understanding around obligations and what have you. Don't know that it necessarily means that this is a dispute issue. There is an underlying educational piece around ensuring people will know how to pay their fair share of tax.

 

Robyn Jacobson:

Can you provide some brief comments, Scott, on what is in-house facilitation and what are these independent reviews that you and Jerome have been referring to?

 

Scott Treatt:

That was something, like if you look at that highway we're talking about, when to get into it and what have you, this is a lot ... A number of these, or a lot of those, all of those, pre-amended assessment. You might be in dispute with the ATO and you just feel at loggerheads on a particular issue. Now, got to say, there's a time you can get into these and a time you cannot. There actually needs to be a dispute. Just because you don't agree with what the tax office is doing at a particular time doesn't necessarily mean that that's a dispute.

 

Scott Treatt:

It takes obviously, it absolutely needs to go through their processes of collating information to be able to form an opinion that you might then dispute. That can be just before position paper, or it's at around position paper time, right? In-house facilitation is bringing the parties together. It's the ATO's form of mediation. A number of people will be used to mediation in the courtrooms, or in relation to court processes, but in-house facilitation is that pre-amended assessment, bring the parties together, let's try to resolve where we are and where the issues are.

 

Robyn Jacobson:

I just want to pause you there, Scott. Jerome, do you see much use of in-house facilitation in the corporate world?

 

Jerome Tse:

Not really, Robyn. It's probably just a factor of the issue involved and the numbers at stake. It's not to say in-house facilitation isn't open to the corporates. I just don't think we take advantage of it in preference to more formal ADR processes, like mediations, ENEs, arbitrations [crosstalk 00:34:30].

 

Robyn Jacobson:

Can you tell me what an ENE is?

 

Jerome Tse:

It's called an early neutral evaluation. That's where the ATO will present its case. We'll present our case and you've got an evaluator there, usually a retired judge, or a very senior QC, barrister, who will give an opinion, evaluate the matter and give an opinion on who's right or wrong. It's non-binding, but those type of mechanisms I think are probably preferred by the corporate market over in-house facilitation. And those are also available for the smaller market, too.

 

Robyn Jacobson:

So returning to Scott, if we're not seeing the corporates particularly having an uptake in in-house facilitation, this is certainly something available to SMEs, as well. But you also speak of these independent reviews, so what are these?

 

Scott Treatt:

I'll admit that I've got a bias towards these. I like these. Independent review is having your matter reviewed by someone else in the tax office who is independent of the audit team. In essence, re-deciding the case and looking at all the material that was there. On the public record, there's some data around independent reviews. Now, I know the experience across markets can differ, but certainly in the small market, I think if you run the numbers on what's in the public domain, I think there was something like 44% of the recommendations which were coming out of small business independent reviews were either in full or in part supported in the taxpayer's view.

 

Scott Treatt:

That actually demonstrates to me the small business independent reviews in particular work, and I think in the year that was in question, there were a thousand small business reviews offered and only 163 people took up the offer, which means again, it demonstrates the ATO's communicating quite well what reasons are for decisions and whether or not, should I actually dispute this further? Do I understand why I've received an amended assessment?

 

Robyn Jacobson:

With this 44% that ultimately went in the taxpayer's favor, it's telling me two things. One is that it is saving that taxpayer from having to take one of the further pathways along this highway. In other words, we don't need to go to the point of a formal objection or going into litigation even- 

 

Scott Treatt:

Correct.

 

Robyn Jacobson:

... to resolve it. And secondly it means that we've avoided the taxpayer having an incorrect outcome. In other words, had the independent review not occurred and they chose not to further dispute it, then presumably they would have been left with the adverse outcome against them. To me, this is telling me that that process is working well, as well.

 

Scott Treatt:

Yeah, absolutely. And ultimately that's why it's there, is to prevent unnecessary occurrence of cost.

 

Robyn Jacobson:

There's also an option available through the Administrative Appeals Tribunal, being the small business taxation division, and this is still in its relatively early days, but can you just broadly explain what this option provides taxpayers with?

 

Scott Treatt:

Yeah. Again, as I said earlier in the peace around what is the highway, if you're a small business, you're eligible. If you're moving into a court dispute, so if you're moving into AAT, it is possible to be referred to the small business tax division of the AAT, instead of the AAT more broadly. Now, that effectively just provides that ability to protect oneself in relation to cost. Again, I don't have data in relation to all matters necessarily in the AAT, and what have you, but what I've found fascinating again, based on information in the public domain, was if you look at that first period of operation of small business tax division, 60% of those cases that were going through there actually related to undisclosed income, non-deductible expenses, penalties, or R&D.

 

Scott Treatt:

That's actually quite fascinating when you look at the broad spectrum of issues that could otherwise move through and you look at that and go, "Well, they're probably the right type of things to go into disputes if you're looking at that." Debating what is income, what are deductible or non-deductible expenses? Rather than fact based, other type issues which could otherwise reach dispute.

 

Robyn Jacobson:

It also sounds like it's not really high level technical interpretation of provisions in the Tax Act.

 

Scott Treatt:

You'd hope you're not necessarily getting that in the smaller market.

 

Robyn Jacobson:

Agreed. Interested in thoughts from both of you, and I'm going to go back to Jerome first, how do we make the system more efficient? How can we reduce disputes, even below the relatively low level they are now?

 

Jerome Tse:

I think the first point when we talk about cost of litigation, I think we need to go beyond my costs, the lawyers costs, the accountants cost, to the cost of focusing on tax rather than your business. That has a real impact. If you're dealing with a tax dispute, not dealing with your business, there's an opportunity cost there. Having dealt with some higher net worths, as well as corporates, especially when it's your own money, there's an emotional cost there as well. It drains you, having to deal with cost of a dispute.

 

Jerome Tse:

I think when we're looking at efficiencies and how to get better at tax disputes, I think we have to look at the cost side, as well. Not just numerically or economically, but more broadly. I think it starts with better education and better understanding of policy. Better guidance on policy from parliament perhaps, better guidance from the ATO on administration and perhaps even education.

 

Jerome Tse:

We've got a role as The Tax Institute in helping educate tax agents and the public, and all of that I think will eventually drive efficiencies and get us to the right amount, the right outcome for the system with the least amount of I guess friction, if I call it that.

 

Robyn Jacobson:

Scott, I've also been reflecting on the impact of COVID on this, and if you can bear with me as I join all these dots, technology is clearly a pathway to improving the way we do things. We've known for some years that the government more generally is on this roadway to a digital space for all of us to engage with government. Many will remember the proposal to bring in a $10,000 cash limit to try and address what is known as the shadow economy. So, undeclared income or cash moving around that is basically off the books or away from the authorities.

 

Robyn Jacobson:

That never went through ultimately and since we've been in these rather extended lockdowns, particularly in the Eastern seaboard, it's very rare to see anybody paying with cash. This came about because of the contactless payment forms that everybody wanted, so we weren't touching cash and sharing the viral infection. It's almost through some sort of alternative pathway that we've ended up not through a deliberate process of getting rid of cash, but through this alternative way, but through COVID we're now using PayPass and EFTPOS and electronic means of payment far more than we ever have.

 

Robyn Jacobson:

When we talk about credit card usage, I'm thinking of businesses that might have had increased cash sales and have now switched either wholly to digital sales, or certainly lessened their cash sales, which by definition puts those sales on the books, which by definition has to therefore reduce the amount of non-compliance. Thoughts?

 

Scott Treatt:

Interesting drawing all of that together, but I don't know that I necessarily agree. Your cash sales, yes, I agree. They've dropped. Why? Because we just simply can't go to the shops and cash across the counter. Some of those industries to which you refer there are higher risk industries, and their sales in this environment are likely to have suffered, as well. Their doors are shut. Their sales will have dropped. I don't know that you can draw an actual nexus between what their incomes were pre-COVID to what they are now, to be able to then say, "Well, actually, more is now being captured" because Sydney's about to open up again, those restaurants will start opening up again, people will all have cash in their wallets again. That environment opens up again.

 

Robyn Jacobson:

But do we see a return to the pre-COVID where cash was used extensively in retail hospitality, or have habits now been formed that are going to persist beyond the COVID situation? I'm just interested to see where this lands long term. I wonder if habits will ultimately change.

 

Scott Treatt:

It shall be interesting to watch the statistics over the next couple of years, absolutely, I would agree with you. I think though, what has highlighted during this period is a bit more of education and understanding around what one's obligations are. Because their habits might have been that I had some cash sales before, now I haven't, now everything's disclosed, maybe their habits change. I know my mind doesn't necessarily think the same way as theirs.

 

Scott Treatt:

It may have influenced those type of behaviors. But I think longer term anyway, how do we improve compliance and reduce disputes? I do think a lot of that comes down to education. I think one is understanding obligations, your own personal obligations and that for your business. And then understanding reasons decisions being made. People probably understand what the system's doing and the reasons why something's accessible, why something's not deductible or what have you, then it does lessen the impact of dispute. But we spoke before of the litigation numbers. That's one part of it.

 

Scott Treatt:

The numbers you shared with us in preparation for this session, Robyn, I look at the objections. It was 2017-18, there were 24,350 objections resolved. '18-'19, it was 26,000. '19-'20, it was 22,000. Average that out, you're sitting mid 20,000 of objections which are resolved. I stress resolved because I find that a little misleading. It doesn't give us transparency on how many were actually lodged, but if I'm looking at that element of those being resolved, that is actually still quite a high number of people who are lodging an objection for one reason or another, for an amount being included in assessable income or denied as a deduction for one reason or another. [crosstalk 00:45:23]-

 

Robyn Jacobson:

We also don't know which way the objections were resolved. We just know that they were resolved.

 

Scott Treatt:

Very true. Very true. But it does demonstrate that there must be an opportunity there to increase education, to lessen the number of objections that are going through in the first place.

 

Robyn Jacobson:

Jerome, the ATO often talks about in its compliance documents, about there might be a particular risk or a concern or something they've identified. But we will commonly see wording that we don't dedicate compliance resources to that particular issue. Is this a practical way of dealing with how the ATO should approach compliance?

 

Jerome Tse:

Firstly, it's a matter for them, how they want to spend their limited compliance resources. What I'd say is it doesn't give taxpayers certainty, because even though they won't dedicate compliance resources to the issue, if they are auditing the taxpayer for a different reason, they will still pick up on it. It's not a guaranteed, "We won't look at you on this issue" point. It doesn't give taxpayers the degree of certainty that you would with a ruling, a private binding ruling or otherwise.

 

Jerome Tse:

Having said that, look, I'd rather have that assurance than not, and I think taxpayers would rather have that than not. But I wouldn't want taxpayers or our listeners to be confused that that means that they're not going to have to consider the issue in the next three or four years because they might.

 

Robyn Jacobson:

So it's not what we'd call a safe harbor.

 

Jerome Tse:

It's not a safe harbor. And some people say, "Well, why bother putting that out then if you're not going to give us that guarantee?" It gives you a little bit of a comfort that you can move on, and maybe for most people, most taxpayers, that's enough. It's a hard one. It depends on taxpayer situation. Like, any good lawyer would tell you, Robyn.

 

Robyn Jacobson:

Of course.

 

Jerome Tse:

Depends on the facts.

 

Robyn Jacobson:

I'd also like to just wrap up our discussion with this final discussion on some global observations, and in particular, there is something called BEPS Action Item 14. Now, that's a mouthful. To break that down, BEPS is base erosion profit shifting. It comes from the OECD and it would be good to just explain for some of our global listeners, what does all this mean and what are the implications of BEPS Action Item 14?

 

Jerome Tse:

You're right, Robyn. What BEPS Action 14 is about, it came out of a project that the OECD started, I think about three or four, or five years ago now. 2016, I think. It came out with a number of findings or actions and one of them was Action 14 on how to really look at better ways to make dispute resolution more effective. That's in the context of treaty disputes. Double taxation disputes, under our double tax agreements, and the broader, multi-lateral instrument, which is where a number of countries signed up to single-handedly change their treaties in one go.

 

Robyn Jacobson:

So what we'd call cross-border? There are dealings or transactions across the borders of two countries.

 

Jerome Tse:

Yeah. Where let's say Australia might say that is deductible here or not deductible here, should it be assessable on the other side? It is on cross-border transactions, where you might get a different tax outcome between the two countries. And in that context, I think what BEPS Action 14 is looking at is trying to find minimum standards on dispute resolution that all the countries can agree on to improve dispute resolution generally.

 

Jerome Tse:

That could be through the increased use of bilateral advanced pricing arrangements, where both parties, both states, both countries sit down together and work out the tax outcome for the transaction. They've also looked at educating tax officers to get a more efficient outcome. When we're looking at these disputes, you enter into what's called a mutual agreement procedure. That's the procedure where you get the ATO, for example, to go and talk to the counterparty authority in let's say America, the IRS, and work out that solution between them.

 

Jerome Tse:

Get clarity on when you can use MAP, what we call MAP, and who gets to apply for MAP. What's most interesting I think development for us and what I'm hearing from the corporates is the adoption of binding arbitration. Previously in MAP, you could go on forever if the two tax authorities couldn't reach agreement. Australia and a number of countries now coming out of the BEPS project have agreed to binding arbitration where the countries are now required to enter into an arbitration to get an answer in a specific time, and that gives certainty to the taxpayer on how the transaction will be treated across the jurisdictions.

 

Jerome Tse:

I think that's a good thing for that particular taxpayer, and it gives certainty. It makes dispute resolution easier. The question I guess from a system perspective from me is it doesn't create a precedent. It doesn't help anyone else, unlike a court decision. You might be, and I think a lot of companies or corporates are now looking at binding arbitration as the alternative to going through the court process. But is that going to be better for the system in the longer term? I think only time can tell, Robyn.

 

Robyn Jacobson:

Thank you. Scott, any comments on that?

 

Scott Treatt:

Not on that. I think globally in each particular jurisdiction, not necessarily focused across jurisdictional disputes, I think there's the opportunity to improve dispute resolution processes holistically. We're not alone when it comes to improving dispute resolution processes. I think one thing Australia should be looking at is how we can accelerate the time taken for disputes? How can we bring forward outcomes or certainty on issues which are precedential? So that the system can operate with certainty as it's moving forward. That to me would be probably where I would close my remarks and just say yes, there's a lot that moves through our system effectively, right?

 

Scott Treatt:

You look at those numbers that we spoke about earlier. It is only a very minute proportion that end up in litigation. Even though I highlighted the number of those objections actually resolved each year, in the scheme of things, yes, it's 25 odd thousand objections. But on 39 million lodgements, was it that you said earlier? That's not a large number. We can increase education through that process but if we speed up the resolution of disputes and speed up certainty on precedential issues, many of those objections and disputes may not actually arise. Because people actually have certainty earlier on. We don't actually have to get there in the first place. So, [crosstalk 00:52:39]-

 

Robyn Jacobson:

I'll consider that your wishlist, Scott. Perhaps Jerome, if I could just ask you what's on your wishlist? One quick item, what would you like to see changed or improved in the system?

 

Jerome Tse:

I think encouragement to get off the highway quickly, or as quickly as you can. There are always opportunities. Keep your eye out for those, and you'll do better for your client. You do better for yourself if you're in that position. I think that's a high level, that's what I say to my clients. How do we avoid court if we can?

 

Robyn Jacobson:

Thank you, Jerome. And thank you, Scott. I think we've covered an enormous amount of ground in this discussion and I'm very grateful to you both for your time and your insights. Thank you for listening to this episode of TaxVibe. I've been chatting with Scott Treatt, General Manager Tax Policy and Advocacy at The Tax Institute, and Jerome Tse, Vice President of The Tax Institute. 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 on social media, follow The Tax Institute on LinkedIn, Facebook, Instagram, and Twitter.

 

Robyn Jacobson:

You can join the conversation on our member only community forum at community.taxinstitute.com.au. Not a member of The Tax Institute? Join a collective voice of 15,000 practitioners at the heart of the profession and find out what the best tax professionals have in common. Join today and you'll have an all access pass to the tools, resources, and opportunities that make our members some of the most successful tax practitioners around. For more information, visit membership. You can also contact us by emailing taxvibe@taxinstitute.com.au. We look forward to you joining us next time. 

Episode 11 — Taking stock of COVID-19 support measures

Release date: 15 Sep 2021

In this episode of TaxVibe, Robyn chats with Scott Treatt, CTA, General Manager, Tax Policy and Advocacy, at The Tax Institute about the range of COVID-19 business support measures on offer around the country and the pathway forward to a better tax system.

 

Host: Robyn Jacobson, CTA, The Tax Institute

Guest: Scott Treatt, CTA, The Tax Institute 

 

 

 

 

 

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.

Robyn Jacobson:

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'm joined by Scott Treatt, general manager, tax policy and advocacy at The Tax Institute. Scott is a chartered tax advisor, and has been practicing as a tax specialist since 1997, gaining his experience in large, second tier and Big Four accounting firms, as well as government.

Robyn Jacobson:

Over the years, he's been engaged on direct and indirect tax issues pertaining to individuals, startups, small businesses, private groups and multinationals, addressing issues including, but certainly not limited to: asset, business, and entity transactions and disposals, insolvencies, structuring, succession, and disputes within family groups, as well as with the ATO.

Robyn Jacobson:

Scott has a passion for our tax system and tax education, continuously seeking to find opportunities to improve the efficiency and effectiveness of both. Scott is a regular presenter at industry events, and has been a lecturer for some 12 years in The Tax Institute's structured education programs. Scott joined The Tax Institute in November 2020. Scott, welcome for the very first time to TaxVibe, and this will certainly not be the last.

Scott Treatt:

Yeah. Thank you very much, Robyn, for the kind introduction, and certainly not the last.

Robyn Jacobson:

There's always so much to discuss, but I thought the focus of today, we could have a look at what's going on by taking stock with all the support measures that are on offer around the country, for COVID-19 in terms of business support. Now, where does one start reflecting on the economic, the personal, and the mental health impact of the COVID-19 pandemic?

Scott Treatt:

Where indeed? What an environment we're in.

Robyn Jacobson:

No one saw it coming. No one saw it coming on this scale. We're deep into the second year of the pandemic. You're up in Sydney and remain very much in your extended lockdown. I'm based down in Melbourne, and in fact, on the 23rd of September, if all the internet searches are correct, then Melbourne will have spent more days in lockdown than any other city in the world, as we hit 235 days on that date.

Robyn Jacobson:

And that will break the cumulative 234-day record that Buenos Aires set in Argentina. Now, lockdowns continue. We are starting to see a little bit of glimmer of hope, and we're starting to see maybe a bit of movement before the end of the year.

Scott Treatt:

Indeed.

Robyn Jacobson:

But I'll just let you make some opening comments about where we've landed. We're 18, 20 months into all of this. And gosh, it's been a tough ride.

Scott Treatt:

It has been a tough ride. It has been such an impact on the community, businesses, the accounting and legal profession. They've been at the forefront here. There's been a massive learning on the tax community in particular, to help roll out the stimulus measures and support measures to keep the economy rolling, to keep us afloat for when we do eventually come out of this.

Scott Treatt:

And as you say, there's a light at the end of the tunnel. As I always say, let's hope it's not a train coming the other way, but it's been a rough ride for so many people. And yes, there's the physical, there's the tiredness and what have you.

Scott Treatt:

But that mental cost, that mental cost that is there on the tax community, on businesses, on individuals locked up at home and the families dealing with kids. The skills, the resilience that people have had to draw on, it's extraordinary. Unprecedented, really, in my view. Unprecedented.

Robyn Jacobson:

There's a saying that you need to be at your strongest when you're at your weakest, and I think we've all had to draw on enormous strength to get through this, wherever you are in the country. You may be in states that are not directly in lockdown at the moment, but certainly businesses have been impacted by, for example, the lack of travel from the east coast to the west coast, or down to Tasmania.

Scott Treatt:

And it's not just travel, right? Tourism is huge now in our country. It's a massive underlying support for our economy. It's the supply chain. There's the indirect flow-on for each of those jurisdictions, should one jurisdiction be suffering.

Scott Treatt:

And I haven't tested the data, but if you believe the actual figures that Gladys has been talking about, 70% of the population resides within New South Wales and Victoria. Don't know that it's quite 70%, but let's use that figure.

Scott Treatt:

Those two jurisdictions are the one that's been in the lockdown. That has a massive flow-on effect through the supply chains throughout the whole country, in addition to the restriction of movement and the impact on tourism.

Robyn Jacobson:

And then on top of that, you've had other states and territories that, for shorter periods, have been moving in and out of some form of lockdown.

Scott Treatt:

Correct, correct.

Robyn Jacobson:

The uncertainty and not knowing what's going to happen and how long this is going to go on for. The Tax Institute, of course, has been very much supporting our members since all of this hit in March last year, and we've been assisting members to understand and decipher and deconstruct and communicate just the volume, the absolute array of information that's been available to guide us, the constant changes.

Robyn Jacobson:

Do you think, when all this was put together at very short notice, and we've got to commend the government for actually getting it through parliament as quickly as they did at the beginning of last year, do you think it was deliberate design to put the accounting and tax profession at the core of this, as the key intermediary in delivering support? Or do you think that's almost a byproduct?

Scott Treatt:

No, I think it's a natural consequence of the way our system operates. You look at the number of taxpayers who use a tax agent, and what is it? It's above 75%, or a figure like that. It's significant. Tax agents and accountants, lawyers play a core role in our economy, right? Be it the administration part, or be it here in a support aspect. I think it's a natural fit for us, I will say "us," to play that role. And I don't know that it was considered specifically, but I think it was just a natural way that the systems rolled out.

Robyn Jacobson:

And if you think about the business community, about 95% of businesses use a tax agent. So that becomes even more accentuated, if you like, when you move into the business community, instead of the households.

Scott Treatt:

Indeed.

Robyn Jacobson:

So it is logical that businesses would have turned to their accountants and the tax lawyers where appropriate for assistance. So today, while of course, a lot of the financial support provided by government has been directed to households, I think with everything we'd like to get through, we'll confine our remarks to the business support.

Scott Treatt:

Sure.

Robyn Jacobson:

I'm going to kick off with JobKeeper. I can't not talk about support. Yes, the program has ended, but this was an unprecedented level of support by the Commonwealth. Now, we're talking total figures, I think, have landed around $70 billion all up, in terms of what was provided by financial support, and that was just across one moving support and all of the support provided by the Commonwealth, designed and legislated in a remarkably short period. I mean, it is-

Scott Treatt:

Oh, absolutely. Absolutely. Again, let's use the word "unprecedented." It was so quick, and that speed naturally then leads to issues. Right? Naturally.

Robyn Jacobson:

Does that set a precedent, that now they've proven they can do it in a short period of time?

Scott Treatt:

Well, we're still going to encourage consultation. We're still going to have consultation. In that environment, though, you've got to look at it and say, "Well, actually, we had to bring the law through. We had to bring the implementation in, without that level of consultation that we'd ordinarily expect, so that we could at least commence." The economy needed it. The public needed certainty. Business needed certainty.

Robyn Jacobson:

There have been criticisms of JobKeeper. There have been criticisms about the way it was designed. There have been criticisms about the way it operated. There have been criticisms about the way it was administered by the ATO. In short, did it work?

Scott Treatt:

Criticism's always easy to throw in hindsight. Did it work? In my view, yes. I think it worked. It did the job that it was intended to do. Could there have been different ways of doing it? Yes, but with the timeframes that we had, with the unexpected environment that we had, we had to do something.

Scott Treatt:

And I think both sides of government came together and brought in the program which worked, ultimately. Yes, then there were some teething issues. Yes, we worked through that. We consulted well with government or the professional bodies worked well with government then, and the ITI, to push this out.

Scott Treatt:

And as you said, you have to commend the way the government approached it. You have to commend the ATO with the way that they brought it through, they implemented it, they administered it. It worked as well because we had consistency. We had consistency across the country. The ATO had much of the underlying data needed to test the ability. They had a lot of the data there to test and maintain the level of integrity. Again, was it perfect? No. But commendable.

Robyn Jacobson:

There's been a lot of talk about, "Should it have continued?" And I don't particularly want to get too far into that particular conversation, but I think as a statement of fact, when the government undertook its mid-term review of JobKeeper around June of last year, decisions were made by July to extend it for a further six months.

Robyn Jacobson:

And I think it should be pointed out that those decisions were made, of course, ahead of Victoria's second extended lockdown late last year, and of course, before the lockdowns had continued well into 2021. So when you look at its cessation at the beginning of the year, we didn't really think we'd be still so entrenched in lockdowns this year.

Robyn Jacobson:

But we're, of course, now moving into a range of state measures which we'll get into in a moment. I just want to link back to JobKeeper from this comparison. I'm interested in your thoughts on this. Did the national rollout of JobKeeper, i.e., administered at a Commonwealth level by the ATO, ensure that it was a more efficient approach than perhaps the state-based approaches that we're now seeing in respect of support for businesses?

Scott Treatt:

Well, I'll answer that in a different way. What last year has taught us, and what this year is teaching us, is to expect the unexpected. We need to be in a position that, we've got systems designed that can deal with the unexpected.

Scott Treatt:

This is not the first large-scale natural pandemic we've seen. Certainly, in most recent times, absolutely. I get that. Certainly not the last natural disaster that we will see, and there will be more large-scale natural disasters in the years to come. We have an opportunity now to look at last year, to look at the present environment and say, "What's going to work?"

Scott Treatt:

What worked with JobKeeper was the consistency. A national approach, a centralization. Information that ensured eligibility was easy to determine. Systems in place that ensured integrity of the system as much as possible. We've got an opportunity now to look at, how can we do this in the future, which ensures we've got a program which is scalable, so it can be dealt with on a local basis or a national basis?

Scott Treatt:

One which addresses any concerns of secrecy, any concerns of data-sharing and information-sharing, so that we've got a body, preferably, in my view, a national body, that can roll these out quickly, and scale it as necessary for the next time some significant natural event arises. I think it's an opportune time to learn.

Robyn Jacobson:

"Scalable" is a word that was used by the prime minister in March of last year, when the first trench of support measures was announced, and I think anyone who expected that we would not see further change or tweaks to the system, would not be mindful of the emerging health crisis.

Robyn Jacobson:

It has to be fluid. It has to adapt to how things are changing, and where the health crisis is, and where those pressure points are. So, I know on one hand, the profession has just been constantly rolling its eyes at the volume of changes and all the updates and having to keep on top of it. But at the same time, those changes are necessary. And if further changes clarify something that was unclear before, then I'm in favor of that.

Scott Treatt:

Changes are necessary, absolutely. I think what we're seeing though, right now, in the present environment, is we've now got state-based measures. We did this once before. You say that Scott Morrison made those comments in March 2020. Okay, we're at September 2021.

Scott Treatt:

So, what have we learned over that period of time? Why is it that we're now redoing what we did last year, at eight months ago? We're going through a process of re-learning, re-implementing systems and designs across a state-by-state basis, instead of leveraging a lot of what was actually learned and implemented with JobKeeper at eight months ago.

Robyn Jacobson:

And it does, at times, feel like we're back to first base, doesn't it? That we're re-inventing the wheel.

Scott Treatt:

It certainly does. It does, and there's a number of issues and concerns, and we've seen it through the many webinars that we've done, where the questions are being raised which were the same questions which were asked at eight months ago.

Robyn Jacobson:

I think one of the fundamental differences is, the ATO is very accustomed to consulting with the profession. All the stewardship groups, the various forums. There is constant engagement and it's very collegial. State governments maybe aren't as accustomed dealing with the profession in this context as the ATO is, and maybe that's something that we can look to those opportunities in the future, particularly when we talk about tax reform.

Scott Treatt:

Yeah, and look. You look at the issues that have arisen. Sure, they've arisen, but the state governments have moved on. They've learned, and I think the positive there is that ... Was it pleasant to go through that? Maybe not, but the positive is that there is a higher level of engagement now, and we expect that that will last into the future. So, they've learned. We're working together. I only see that as a positive aspect of what has happened.

Robyn Jacobson:

Agreed. So, let's focus specifically on New South Wales as we take a tour around the country. Now, this has attracted the most attention. It's the largest volume of support at the moment in terms of the dollars rolling out. Yes, Victoria is continuing in lockdown as well, and we'll turn to Victoria shortly.

Robyn Jacobson:

But New South Wales, with the introduction of initially, the business ground and now the JobSaver program, there are some differences from JobKeeper. The most important of which, there is no wage condition. You don't need to pay your employees to be able to receive JobSaver.

Robyn Jacobson:

So there have been some teething issues as it's rolled out, but can you comment on how those are being smoothed out, and in particular, the role that the profession has played in working with the New South Wales government?

Scott Treatt:

Yeah, absolutely. Yes, as you acknowledged earlier, there's some teething issues. There were some issues around how consultation was taking place, but once the connection was established with the New South Wales government in this particular case, they have been so receptive to the issues and concerns that have been raised.

Scott Treatt:

I'm really pleased with how the New South Wales government now is listening to the issues we're putting forward, that we've heard from our members, that the other professional bodies have heard from their members, that other industry representatives are sharing with us as the joint bodies, to be able to take to government.

Scott Treatt:

Just the fact now that we've got regular meetings with them is awesome. I've got no other word to use than that. Just they are engaging, yes, again, hindsight, people can throw stones and they can criticize and say, "Why didn't it happen earlier?" And what have you.

Scott Treatt:

I hear that, but we're getting the data. We're getting the information. We're getting the knowledge that we need to pass on to our members now, and the New South Wales government is open and willing to share, quite transparently, what we need to know. And that's an exceptional step forward from where we had been a couple of months ago.

Robyn Jacobson:

And most importantly, the money is now flowing to the businesses who are most in need.

Scott Treatt:

Correct. It is flowing out, and again, there's still issues there in terms ... Some people feel the timing is still a bit slow, but the government is working through that. And we do acknowledge too, that there are some businesses who still have not yet applied because they don't know that they're eligible.

Scott Treatt:

And again, we're working through that. We're trying to get that information out of the government as quickly as possible to pass it on to our members, so they too can understand which businesses haven't applied, so that they now can.

Robyn Jacobson:

Absolutely. Now, as part of the overall package, of course, there is the micro business grant for those under 75,000. There's the small business fees and charges rebate. But the main focus has been on JobSaver. And look, to some extent, it has been a complicated set of rules, but I'm going to look at it from another perspective.

Robyn Jacobson:

It's been an approach to looking at a support program with less bells and whistles than JobKeeper had. So it doesn't have all the moving parts that some people might be expecting or familiar with under JobKeeper. In other words, it's done its job or it's continuing to do its job.

Robyn Jacobson:

It may not have the level of sophistication and all the moving parts that we'd like to see, but I think at the end of the day, it is getting that financial support out to the businesses who are being affected by the lockdowns in Sydney and across New South Wales.

Scott Treatt:

And I think it's more tailored ... That's probably the wrong word, but there's more uniqueness about the support that's coming through. Different levels of businesses are getting different levels of support. There's a greater level of variability, which is probably right when you look at the variability within our economy, within businesses. I think that's right.

Scott Treatt:

And you used the word there, "complex." I guess anything that's new is complex, and as we get used to it, it becomes less complex. And again, with the clarity that's starting to flow out of New South Wales government, I don't know that it's as complex as what it appeared to be if we, again, move two months into the past.

Scott Treatt:

But again, it highlights, if we have a standard approach as we move into the future, and we have something which people are aware of, sits in the background, ready to have operation and then scale up as economic situations change, that uncertainty, that complexity is not so much there, because people know what to expect.

Scott Treatt:

So now is an opportunity, as I say. Let's set up a precedent. Let's set up the systems and programs so that next time it comes, the rates and amounts, et cetera, might all change and move around, but at least we know what general eligibility would be, how the money's going to flow, how we're going to deal with over-payments, how we're going to deal with under-payments. All of that is stuff we've learned over the last 18 months. It's information we can apply to the decision of future-proof systems.

Robyn Jacobson:

Setting up a framework.

Scott Treatt:

Setting up a framework.

Robyn Jacobson:

Let's move south across the border, into Victoria. Very different approach, and there has been speculation as to whether we would see a JobSaver-type program in Victoria. But for the moment, the state government of Victoria is rolling out a hardship grant.

Robyn Jacobson:

Now, this is now, $20,000 with the significant difference from the other states around the country, that you've got to have at least a 70% declining turnover, as opposed to 30%. Now, that is higher and many will debate the merit of that particular threshold, but it is what it is. In terms of contrasting the approach with New South Wales, interested in your comments.

Scott Treatt:

Yeah. It's really a challenging one. It's a political one. I am personally challenged by the use of the 70% threshold. I look at it and think, "In what state, in terms of economic performance of the business, in what state is a business when it's hit the 70% declining turnover?"

Scott Treatt:

Imagine the underlying stress, the personal toll, let alone the financial toll that that business is already suffering. And to hit 70% rather than 30%, I do, I struggle with it. And then you look at the level of support. Again, it's variable in New South Wales.

Scott Treatt:

So in New South Wales, you have got a minimum of $1500 per fortnight up to, for much larger businesses, a significant amount. But it started as between $1500 ... Sorry, it was $1500 a week, through to $100,000 a week. Now, that amount contrasted to a one-off grant of $20,000.

Scott Treatt:

If you're at a declining turnover of 70%, to what extent will $20,000 get you through, as what you have said is a record, world record lockdown period, that the Victorian economy is going through? It's challenging to see, and as you say, contrast the two different approaches.

Robyn Jacobson:

And I don't find that it's appropriate to look at a lockdown period in isolation. And look, I can't recall the exact date off the top of my head now, we've had so many down here in Victoria. But a lockdown of, again, let's call it