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End of Year Tax Issues 2024 

Release date: 17 June 2024

In this bonus episode of TaxVibe, a snippet of our member-only webinar, you'll hear Robyn Jacobson, CTA, cover some of the hot tax topics to be aware of as we near the end of the financial year.

This episode covers insights into:

• Personal income tax cuts

• Student loans

• Work-related expenses

• Rental properties

To see the full webinar, and access other member-only insights and resources, become a member of The Tax Institute. Learn more here.

Robyn Jacobson, CTA

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

Chris Wookey, CTA

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

Robyn Jacobson, CTA

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

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

Alright, so let's get into it, starting with what we know when it comes to the taxation of individuals. Now you're of course cross the stage three revised tax cuts and these kick in on the 1st of July this year. Now just the completeness, this slide shows you stage one and stage two, which of course have been in place for some years now. I'm not going to go through every thresholds and right with you, it is obvious by what's indicated in red. But I did want to make some observations about what this means for your clients and what their expectations are over the next year. So if I make an out of this inside slide, firstly, I know there are going to be some clients and certainly the community more broadly, particularly those who don't, these tax agents who may confuse the start date of the tax cuts being 1st July 2024 with the tax position for 23/24.

So of course this does not alter their income tax position for the current financial year, and nor does lodgement of the 24 tax returns have any impact. So 24 cut it off. Make sure you explain to your clients that this is all to the 24, 25 year onwards. Secondly, I haven't seen much narrative on this, and it's something that you may wish to raise with your clients, but the government is being broadly saying in all its messaging. Every taxpayer receives the tax cut from one July this year. Well, firstly, it's only income tax. So of course if you're paying GST, then that doesn't make you a taxpayer for this purpose. Secondly, there are people who may pay tax, but they may be in terms of the final tax position below the tax free threshold. Now, of course, they would get a refund of any tax they've paid, but ultimately, if they're below the tax free threshold on whether that's increased by way of other offsets, apart from the low income tax offset, they may not have a net tax position, which means they're not going to benefit from this. But moving to those who are on the withholding system, anybody who's on a pay widening withholding arrangement as an employee will see an immediate benefit from their first payroll from the 1st of July. This year. But anybody who's on the pay by installment system only and I'm talking about sole traders, certain businesses, of course, and your investors, they pay their tax by way of installments. And these are going to be adjusted because of the tax cuts. So they will pay their installments, as usual, varying, if that is appropriate, and they won't effectively see the benefit of the tax cuts until they lodge their 25 tax return. Work out whether any tax has been overpaid. And then, of course, that would be adjusted upon assessment. So it just a distinction I think is important because those who are not on withholding, I'm not going to say that immediate beneficiary. Of course, a reminder to employers they need to make sure that they adjust their PAYE YJ withholding tables effective the first payroll from one July this year and we are expecting that the ATO will be updating those recording tables in mid-June. Now that obviously would be around this week, perhaps into next student loans for those.

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

moving on to work related expenses. Now you can run a whole webinar on this alone, but some key considering options are listed in the next couple of slides. Now, starting with the course car expenses, this is cents per kilometer. The $0.85 is in a registered instrument, so that is already, if you like, in the legislation and the rate for 2425. The ATO has issued a draft legislative instrument yet to be registered and it's proposing the rates will be $0.88. Not particularly seen changes in the draft to the final over the year. I would expect that to go through as is. And then of course we've got the relatively new approach for electric vehicles at 4.2 cents per kilometer and that can be applied for either FBT or for income tax purposes. Now, notably D1 is only where you own or lease the car. If you're borrowing someone else's car that it becomes a travel expense at D2, not a car expense at D1 d2. I'm going to skim over this. You've got lots of guidance on the relevant reasonable trouble and over time meal allowance expense amounts for the 2324 year links there. There's information on FBT accommodation, food, drink, itinerant workers. There is so much that goes into this but have regard of course to itinerant workers, bulky tools and equipment, home to work, travel, whether it is legitimate travel or whether it's just someone who is choosing to stay somewhere else for the convenience of being closer to work. That doesn't automatically make it travel. So it's very important to look at the character of the expenditure that's being incurred and make sure it's being classified correctly. Also, the ATO will of course be looking at a correlation between working from home expense claims and travel expenses, and you would think that somebody who's working from home should have minimal travel expenses and vice versa, unless they're working particularly ridiculous hours and they're traveling as well as doing significant hours working from home. But a typical worker who does travel or is working from home, there shouldn't be high claims for each of those in the same return. Moving onto clothing expenses at day three, a reminder about all the rules regarding compulsory uniforms, the non-compulsory uniforms which must be registered in order to make a claim for those protective clothing, is okay and occupation specific clothing is okay. But anything that is required to be worn by the employer But isn't occupations specific? Can we go back to our chefs pants and our baristas robes and the like? Or is some type of compulsory or non-compulsory registered uniform is simply not deductible and that includes the waiters who are required to wear black. That's still conventional clothing. Same with typically gym wear and similar. Now don't forget about your $150 worth of laundry. There needs to be a calculation of the various loads of washing. Also, if you're going to be relying on the $0.50 on the dollar per load and I will leave it with you as to whether you'll make the appropriate inquiries as to whether the, let's say, underwear is also being washed along with the trade clothing as to determine whether it's a 50 cent claim or a dollar claim per wash. All of those personal and product questions to you and your clients, you can work through that one.

Now. Self-education expenses a reminder that the expenditure must either improve your skills or knowledge that you currently require in your employment duties, or is likely to result in an income in your employment activities. So in those other income that comes from those activities. So we've seen so many cases over the years and time doesn't permit us going down all those rabbit holes that you're well familiar with, the necessary nexus between claiming and of course deriving the necessary assessable income. A reminder that the old $250 rule has been gone for a couple of years, so you don't need to worry about taking off that non-deductible threshold first. All right, let's spend a little bit more time on it. The working from home expenses for the 2324 year we're into the full year of the fixed rate method that was revised about 18 months ago. So we're talking here about the $0.67 an hour, the $0.80 an hour shortcut method finished up. That's long gone up post-COVID. Secondly, the $0.52 an hour no longer exists. So the taxpayer has a choice of $0.67 an hour under the fixed rate method or the actual cost method. If they use actual cost, they do have to keep receipts for everything and they will need to determine an appropriate allocation for challenging expenses like internet, telephone power and your heating, cooling, etc.. Now that includes gas. So if you had to go with the $0.67 an hour that covers your electricity, your gas, telephone, your Internet stationery and computer expenses and consumables. So if you feel your client is going to be better off not using the fixed rate method, then you'll need to work out really essentially by sitting at two sets of calculations that I'll share with you, that when I did my last tax return, I needed to work through this. I looked at the fixed rate and I compared my actuals and you go got seven, which one works better for you? But unfortunately it does increase as a result the amount of compliance work involved. Also, you do not need to have a separate office in order for the working from home expense fixed rate method. It is sufficient that it's simply working from home. You do need to keep a copy of the relevant bill that supports the electricity, the gas or the internet. Not everyone, just at least one bill. And also bear in mind that the $0.67 an hour doesn't include depreciation. So you are able to claim that separately, but you won't be able to claim certain other expenses because of the double dip. The other point to mention is that you have to keep a record of the actual hours worked. If you're going to use the fixed rate method, you can't use a four week diary. You must keep a record in the spreadsheet or some sort of log book or whatever that records every single hour that you work from home during the year.

Right. Moving on rental properties now the year continues to share data with us and I am the co-chair of the Tax Practitioner Stewardship Group. And whenever we meet this is often discussed and that is the fact that that ratio data showing nine out of ten tax returns that include rental property claims have errors in them. This also includes Agent Lodge returns. So there's no suggestion that the nine out of ten that are wrong are all self lodged returns. There are errors being made in returns lodged by agents. Now the ATO has released the Top ten tips to help rental property owners avoid these common mistakes. And I do recommend you have a look at that document. You may run through it and think, Yeah, yeah, we know this, but it is a good reminder and it's also useful to send your clients so they are aware of all the tips and traps that need to be considered when you're looking at rental property claims. Now we are looking at running a number only the webinar on rental properties in the next few months. So keep your eyes out for that. But some common areas that are an issue, make sure that the gross rent is being declared. The ATO is seeing instances where the net rent per the agent's statement is being included in the tax return, and then the expenses in that statement are being claimed against the net rich. So in other words, it's a double dip of the same expenses. Now obviously rent is what gets deposited into your client's bank accounts, but they need to make sure that they're keeping you the full information and that you're grossing that back up to include the gross rent claim, the expenses and of course, anything else that they incur outside of the agent arrangement. I think it's also incumbent upon agents to ask the right questions of clients. So make sure when you're getting that figure, query them and say, is this the net rental or the gross rental figure from the agent when it comes to mate's rates, if you're going to reduce the rental income rate for a fringe for family member, then you're not going to get a full deduction for the outgoings. So make sure that if non market rates are being charged, you appropriately adjust the expenses. There are still issues with clients who are not correctly apportioning their interest where the property is not generally available for rent, but they're still claiming the interest or are they failing to apportion where there is mixed use of the funds? Now another occasion we can run through the difference between original of a mortgage and offset facilities. But it's very important to understand the nature of a loan. And when you got all these different features, how you should treat the interest deduction accordingly. Borrowing expenses to remember the claim is over five years or the term of the line. If that is less than five years, it is not a straight line. In other words, you don't just take the amount of divide by five. Technically the claim runs for the number of days, but it runs over six income years. So for four years and then two part years, check your repairs. Make sure there's no capital amounts in there. Check for something that could be constituted as an initial repair and instead should be treated as capital. Watch out for integrity. So if you fix a pothole on a driveway or a fence paling, that's a repair. Replace the whole fence or replace the whole driveway, even if it's a repair, is considered a capital amount because you've replaced the entirety of it. And it is worth looking at the eight year ruling on this, which remember, is like 90 2/3, but you'll be able to find it with a quick search. Of course, don't forget about the changes with residential rental properties. So for 1st July 2017, you've got your rules for second hand assets in these properties and you'll need to consider whether the depreciation is limited. In these cases. You can't claim depreciation, but you would then calculate a capital loss under CGT event Case seven when the property is sold. So in that case you'd have an A1, typically a capital gain on sell the property plus ak7 capital loss on the sale of the relevant depreciating assets where they are second hand and they've been acquired after that date. You also need to consider no deduction for travel expenses where it's a residential rental property. The $300 rule is still available for rental property owners to claim minor depreciating assets, but it's not on a per asset basis. So anything that is identical or substantially identical or is part of a asset, you need to look at that in the context of the $300 lease.

 

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

Federal Budget 2024-25 

Release date: 17 May 2024

You won't want to miss this bonus episode of TaxVibe, where you'll get a sneak peek behind the closed doors of our member-only Federal Budget 2024-25 webinar. 

In this facilitated panel discussion, our CEO, Scott Treatt CTA, facilitates a panel of experts:

  • Annemarie Wilmore, ATI, Partner, Tax, Johnson Winter Slattery 

  • Clare Mazzetti, ATI, Chair, The Tax Institute 

  • Todd Want, CTA, Head of Tax Services, William Buck & President, The Tax Institute 

  • Robyn Jacobson, CTA, Senior Advocate. The Tax Institute 

They unpack the commercial and practical implications and considerations of the Budget’s key tax and superannuation measures.

To hear the full webinar and access other member-only insights and resources, become a member of The Tax Institute. You can learn more here.

Robyn Jacobson, CTA

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

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

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

We hope you enjoy this episode of TaxVibe.

Scott Treatt, CTA

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

Clare Mazzetti, ATI

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

Scott Treatt, CTA

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

Todd Want, CTA

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

Scott Treatt, CTA

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

Todd Want, CTA

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

Scott Treatt, CTA

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

Annemarie Wilmore, ATI

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

Scott Treatt, CTA

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

Robyn Jacobson, CTA

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

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

Scott Treatt, CTA

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

Clare Mazzetti, ATI

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

Scott Treatt, CTA

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

Todd Want, CTA

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

Scott Treatt, CTA

But this is still just an announcement.

Todd Want, CTA

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

Scott Treatt, CTA

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

Todd Want, CTA

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

Scott Treatt, CTA

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

Robyn Jacobson, CTA

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

Scott Treatt, CTA

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

 Annemarie Wilmore, ATI

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

Scott Treatt, CTA

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

Annemarie Wilmore, ATI

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

Scott Treatt, CTA

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

Annemarie Wilmore, ATI

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

Scott Treatt, CTA

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

Annemarie Wilmore, ATI

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

Scott Treatt, CTA

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

Clare Mazzetti, ATI

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

Scott Treatt, CTA

Understood. Todd, You're a practitioner.

Todd Want, CTA

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

Scott Treatt, CTA

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

Robyn Jacobson, CTA

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

Scott Treatt, CTA

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

Robyn Jacobson, CTA

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

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

Scott Treat, CTA

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

Annemarie Wilmore, ATI

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

Scott Treatt, CTA

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

Robyn Jacobson, CTA

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

 

The tangled web of tax ethics 

Release date: 26 April 2024

Recorded live at our SA Tax Forum, in this episode, Robyn Jacobson, CTA, chats with Tim Sandow, CTA, current Vice President of The Tax Institute and Tax Partner at BDO.

With tax ethics in the spotlight, they cover a range of ethical issues and responsibilities to consider when advising clients on their tax affairs, including the latest on the TASA reforms.

You’ll also find:

  • The importance of acting within the letter of the law and the spirit of the law
  • Relying on information provided by a client
  • What to do if clients do not take your advice
  • Duties when you pick up a new client
  • Tax professionals providing services competently.

Host: Robyn Jacobson, CTA

Guest: Tim Sandow, CTA

Robyn Jacobson

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

Tim Sandow

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

Robyn Jacobson

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

Tim Sandow

Exactly. We're on holiday.

Robyn Jacobson

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

Tim Sandow

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

Robyn Jacobson

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

Tim Sandow

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

Robyn Jacobson

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

Tim Sandow

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

Robyn Jacobson

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

Tim Sandow

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

Robyn Jacobson

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

Tim Sandow

That's right.

Robyn Jacobson

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

Tim Sandow

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

Robyn Jacobson

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

Tim Sandow

Yeah. 

Robyn Jacobson

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

Tim Sandow

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

Robyn Jacobson

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

Tim Sandow

Yes.

Robyn Jacobson

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

Tim Sandow

Yes.

Robyn Jacobson

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

Tim Sandow

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

Robyn Jacobson

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

Tim Sandow

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

Robyn Jacobson

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

Tim Sandow

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

Tim Sandow

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

Robyn Jacobson

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

Tim Sandow

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

Robyn Jacobson

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

Tim Sandow

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

Robyn Jacobson

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

Tim Sandow

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

Robyn Jacobson

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

Tim Sandow

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

Robyn Jacobson

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

Tim Sandow

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

Robyn Jacobson

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

Tim Sandow

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

Robyn Jacobson

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

Tim Sandow

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

Robyn Jacobson

30 days.

Tim Sandow

It's not a long time.

Robyn Jacobson

It is not.

Tim Sandow

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

Robyn Jacobson

Yeah.

Tim Sandow

And, and whether that's there.

Robyn Jacobson

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

Tim Sandow

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

Robyn Jacobson

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

Tim Sandow

Yes.

Robyn Jacobson

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

Tim Sandow

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

Robyn Jacobson

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

Tim Sandow

Yes.

Robyn Jacobson

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

Tim Sandow

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

Robyn Jacobson

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

Tim Sandow

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

Robyn Jacobson

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

Tim Sandow

That's right.

Robyn Jacobson

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

Tim Sandow

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

Robyn Jacobson

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

Tim Sandow

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

Robyn Jacobson

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

Tim Sandow

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

Robyn Jacobson

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

Tim Sandow

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

Robyn Jacobson

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

Tim Sandow

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

Robyn Jacobson

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

SMSF shift: gear up for the latest changes 

Release date: 15 March 2024

In this episode, Robyn takes a deep dive into all things self-managed superannuation funds with Liz Westover, FTI, Partner and National SMSF Leader, Deloitte.

They cover what’s hot in the land of SMSFs, including:

  • Caps, limits and thresholds
  • Illegal early access and the SG gap
  • Everything you need to know about Division 296
  • Changing SG rates
  • Payday super
  • SMSF stats
  • The Tax Institute's upcoming online event, Superannuation Intensive

Host: Robyn Jacobson, CTA

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

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

Liz Westover

Thanks Robyn, lovely to be here.

Robyn Jacobson

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

Liz Westover

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

Robyn Jacobson

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

Liz Westover

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

Robyn Jacobson

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

Liz Westover

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

Robyn Jacobson

Where would we be without Excel spreadsheets.

Liz Westover

Exactly.

Robyn Jacobson

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

Liz Westover

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

Robyn Jacobson

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

Liz Westover

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

Robyn Jacobson

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

Liz Westover

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

Robyn Jacobson

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

Liz Westover

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

Robyn Jacobson

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

Liz Westover

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

Robyn Jacobson

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

Liz Westover

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

Liz Westover

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

Robyn Jacobson

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

Liz Westover

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

Robyn Jacobson

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

Liz Westover

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

Robyn Jacobson

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

Liz Westover

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

Robyn Jacobson

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

Liz Westover

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

Robyn Jacobson

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

Liz Westover

Exactly.

Robyn Jacobson

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

Liz Westover

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

Robyn Jacobson

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

Liz Westover

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

Robyn Jacobson

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

Liz Westover

It's complicated.

Robyn Jacobson

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

Liz Westover

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

Robyn Jacobson

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

Liz Westover

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

Robyn Jacobson

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

Liz Westover

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

Robyn Jacobson

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

Liz Westover

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

Robyn Jacobson

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

Liz Westover

I do.

Robyn Jacobson

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

Liz Westover

Thanks Robyn.

Robyn Jacobson

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

Insights into the world of offshoring: is it for you?

Release date: 23 February 2024

If you're experiencing staffing issues in your practice, this episode is worth a listen!

Robyn chats with Jonathan Ryall, Co-Founder of Frontline Accounting and Paul Franks, Partner, Lambourne Partners, about their experience in offshoring accounting and tax work, driven primarily by labour shortages in the profession in Australia.

They cover:

  • The difference between outsourcing and offshoring
  • Managing risk
  • The offshoring experience from a practitioner's perspective
  • A special offer at the end of the episode!

Host: Robyn Jacobson, CTA

Guests: Jonathan Ryall, Co-Founder of Frontline Accounting and Paul Franks, Partner, Lambourne Partners

Robyn Jacobson

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

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

Jonathon Ryall

Thanks for having me.

Paul Franks

Thank you, Robyn.

Robyn Jacobson

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

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

Jonathan Ryall 

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

Robyn Jacobson

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

Jonathan Ryall 

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

Robyn Jacobson

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

Jonathan Ryall 

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

Robyn Jacobson

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

Jonathan Ryall 

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

Robyn Jacobson

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

Paul Franks

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

Robyn Jacobson

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

Paul Franks

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

Robyn Jacobson

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

Paul Franks

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

Robyn Jacobson 

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

Jonathan Ryall 

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

Robyn Jacobson

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

Jonathan Ryall 

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

Robyn Jacobson

Quality control.

Jonathan Ryall 

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

Robyn Jacobson

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

Paul Franks

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

Robyn Jacobson

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

Paul Franks

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

Jonathan Ryall 

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

Robyn Jacobson

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

Paul Franks

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

Robyn Jacobson

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

Paul Franks

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

Robyn Jacobson

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

Paul Franks

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

Robyn Jacobson

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

Paul Franks

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

Robyn Jacobson

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

Paul Franks

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

Robyn Jacobson

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

Paul Franks

Yes, that's correct.

Robyn Jacobson

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

Paul Franks

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

Robyn Jacobson

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

Paul Franks

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

Robyn Jacobson

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

Jonathan Ryall 

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

Robyn Jacobson

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

Jonathan Ryall 

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

Robyn Jacobson

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

Jonathan Ryall 

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

Robyn Jacobson

Paul, any comments on that?

Paul Franks

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

Jonathan Ryall 

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

Robyn Jacobson

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

Jonathan Ryall 

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

Robyn Jacobson

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

Paul Franks

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

Robyn Jacobson

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

Jonathan Ryall 

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

Robyn Jacobson

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

Jonathan Ryall 

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

Robyn Jacobson

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

Paul Franks

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

Robyn Jacobson

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

Paul Franks

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

Robyn Jacobson

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

Jonathan Ryall 

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

Robyn Jacobson

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

Jonathan Ryall 

That's it, no H.

Robyn Jacobson

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

Paul Franks

Thank you, Robyn

Jonathan Ryall 

Pleasure 

Robyn Jacobson

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

The 2024 tax terrain – treasure and traps included

Release date: 26 January 2024

Strap yourselves in, this is a long episode full of reflections on 2023 and the biggest insights for 2024!

Robyn hosts Todd Want CTA, The Tax Institute’s newly appointed President for 2024. They cover everything from the Stage 3 tax cuts to AI and so many things in between!

Listen to this episode for:

  • Key reflections on 2023
  • The biggest factors at play in 2024
  • Labour shortages in the profession and changes in work practice
  • The upcoming Federal Budget
  • Tax debts and ATO debt collection activities
  • All things superannuation – Division 296, Payday super, NALI/NALE
  • The integrity of the tax profession
  • Todd’s vision as President for 2024, including our new digital micro-learning experience, Tax Academy

Host: Robyn Jacobson, CTA

Guest: Todd Want, CTA

Robyn Jacobson

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

Todd Want

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

Robyn Jacobson

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

Todd Want

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

Robyn Jacobson

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

Todd Want

I think it's been an interesting few years and it's continued to build. You've had a whole range of cost of living pressures that are being felt. Rising interest rates, that type of thing, inflationary pressures and and that's built across a broad range of people and we have multiple speeds in the economy. I think it'd be fair to say some are really feeling the pressure on the household budget, others perhaps not quite as much. But I think if we if we're looking more broadly the tax system and where that heads to help people out to have some more fundamental changes to the tax system will be great to have some genuine tax reform on the table there. But I think we've got enough interesting areas or evolutions in the world of tax this year that it's certainly not going to be a quiet year in the world of tax.

Robyn Jacobson

I was just reading this morning there's been another construction company that's gone into administration this morning down here in Victoria. And I'm wondering with the all the government support that was provided during 2021 and even into 22 is that 23 and 24, we're really starting to see the impact and we'll continue to see the impact perhaps of the post pandemic and the fact that the government support has come to an end.

Todd Want

Look, I think that's right, Robyn, and I think businesses needing to stand on their own two feet, so to speak, and some of those things washing through the system as far as the catch ups where businesses that perhaps have overextended themselves or they've got labor market shortages that are hitting their workforce and their ability to fulfill contracts and do it cost effectively, I think all those types of things are really starting to hit and probably much like myself, getting a bit of time away from from the profession that are operating day to day, a lot of other business people will have taken the opportunity over the summer to to have a little bit of downtime, probably reflect on what has happened with their business and where their business heads moving forward and whether they need to make some difficult decisions leading into 24 or be prepared for difficult decisions that might come. And that's never pleasant. But I think there's also a lot of really positive decisions that people could look forward to this year and opportunities that, as the saying goes, never waste a good crisis. So opportunities also come out of this type of thing. So I think a lot of people will be ready to to step up in their profession and and move forward with a strong 2024 and beyond.

Robyn Jacobson

I'm particularly interested in delving a bit more into the the shortages with the workforce will come to that in a moment. In terms of 2024, what do you see as being the really important factors at play? What's going to shape the landscape of 2024?

Todd Want

Look, I think, as you say, we'll come back to the labor shortages in the profession and more broadly, but inflation is something that we saw obviously over the last couple of years. There was some fairly significant inflation that's know appears as though it's starting to ease. But how quickly does that ease and what does that do for for clients, for businesses, for pricing, for household budgets and also dovetailing into that where the interest rates go and I think have they kept out, is there further increases or will actually we see some cuts later this year. It's a fascinating little interplay there with, with what that means for borrowing capacity as well, be it for for businesses looking to invest. And we've obviously had certain government measures yo instant write off temporary full expensing type things that have meant a lot of businesses acquired, a lot of capital assets, the ability to borrow for those sort of things. Now where's the borrowing capacity for future acquisitions of capital assets, albeit perhaps they aren't as tax effective. Now with with the changes to the instant write off type measures, But still businesses looking to keep themselves at the forefront of their industries. So I think that's an interesting part. Tom. As you mentioned, Robin, the the government support and the ending of that, what will that actually mean? Businesses needing to to manage an environment where they need to be able to fend for themselves and genuinely be able to push a path through without those levels of support. And that will be tough for many of them. I think you've also got get the mortgage cliff that's been talked about and fixed interest rates coming off. People who are on these 2% interest rates or sub 2%, some of them rolling on to five, six, 7% interest rates. What does that look like? And same as business borrowing, What sort of interest rate of businesses borrowing money at and how does that flow through? So I think those things are certainly going to be interesting during the 2024 year. But those businesses, those clients, those taxpayers that have have managed through sensibly, they'll be able to work a path through this. And it's all part of of good business management and economic management, household budgets, business budgets, all those type of things. So certainly those those are some of the things. And perhaps, Robin, you know, we touched on this labor shortages aspect now, because I think that's probably one of the biggest things that is ahead is the labor shortage dovetailed in with what impact does I have on the on the profession. So labor shortages more generally, I think across the economy, the tax in a tax and advisory space is certainly not exempt from that. Are we seeing those shortages where people are trying to recruit more people to us despite proving very tough? And it's not just those people who are running businesses out in the regions and the suburbs. It's everywhere that trying to get good quality people isn't easy. And so that's not going to solve itself magically just because we've all had a Christmas break.

Robyn Jacobson

The idea of upskilling and training staff and looking at alternative pathways. In an upcoming podcast, we're going to be chatting with Frontline who are experts in offshoring. And that's going to be a whole different conversation about how the firms actually resolve that using labor that is offshore and how do you control that. But if we come back to the Australian market for the moment, the course is being studied.vAre we still getting people wanting to embrace the accounting and tax profession as a career, the traditional pathways where you had a job for life, where you stuck with this career and you might have changed jobs four or five or six times, but that doesn't necessarily the same anymore. We've got people who are exiting the profession now, whether it means they're going off into industry, meaning they're still an accountant, for example, but they're simply not working in public practice or whether they're actually exiting the profession entirely. It's an interesting landscape.

Todd Want

Look, it sure is, Robyn. And I think if we look more generally at businesses and and that is new businesses, technology, everything else that has meant that the breadth of skills needed to assist and advise those businesses has evolved over time as well. And the tax profession is is one where people from different backgrounds, not just their cultural backgrounds, but also what they've studied previously, what they may be, haven't studied, whether they do need to upskill in certain areas of tax, whether they specialised in areas. I think it is something that we have got an evolution of what that looks like and perhaps people are looking for different things than perhaps people in previous generations did. The tax profession, though, is still one where there's many, many hugely interesting and exciting things to look at in all areas of tax. But I think the key thing there, Robin, about upskilling and training is really crucial. It doesn't matter the background, if someone is keen and they are bright enough to do it, they can do the study, they can upskill, they can train and bring themselves up to speed and be able to be a really well equipped advisor to be able to provide the sorts of things that clients are looking for. And then that's exciting. I think as a profession that the the breadth of skills the different backgrounds bring can actually make the profession more vibrant moving forward. And I think that would be a fascinating thing to play out over the next generation or to.

Robyn Jacobson

Comment on cultural shift. And I'm not just referring to working from home, although that's a big part of it. Are we seeing changes in the way that an aspiration to be a partner? Amersham may not be the driving motivation for young practitioners. Maybe they do want to progress, but they don't want to take over the ownership or the capital, the equity or the responsibility of running a practice. What are you seeing out there?

Todd Want

Well, look, I think there's certainly still a a strong amount of people who do aspire for that partner type thing. But there's also a large amount who perhaps that's not for them and there's nothing wrong with that as long as it's clear to everyone and the balance is right, nothing wrong with people wanting the balance in their life and perhaps the changes of their career throughout, I think I certainly enjoy my week here. Yes, there's plenty of hours worked in my week, but I also enjoy going coaching my kids sports teams or taking them to swimming lessons. You know, every every couple of weeks they're going to see them. And that's a part of my work life balance that actually helps keep me sharp for for the time that I am focused on working on client matters or doing tax related things. So I think that the evolution of you're not chained to a desk, if perhaps there was a perception that that was the only way to to be effective. I think that shift is an important one. But the work life balance and what that phrase actually means, I think is a really important one. And getting that right for for everyone and making it clear between the employer and the employee that, hey, they might aspire to be a partner, but that doesn't mean they have to work ridiculous hours every day of the week getting that balance rights are important. So I think we'll continue to see an evolution of it. Robin, as you say, the work from home is a part of that. The flexible working hours, those types of things. I think it's just something that will continue to evolve.

Robyn Jacobson

In terms of the role of technology. Some firms have embraced it, others are still perhaps a little more resistant. And I'd like to do things the way they've always been done. There are certainly some great tools out there, but if we look at, for instance, CBT and in terms of it being a useful tool, productivity more efficient, but is it any way in terms of detracting from the quality of what we bring as professionals with the expertise and the experience? Can it make decisions? Can it judge ethical dilemmas? It's an interesting question about how I can be used in a practice.

Todd Want

I think you could open up a Pandora's box here, Robyn, of things, but technology there is no doubt about the fact that technology, if harnessed correctly, is very powerful in the world of tax, be it whichever part of tax you're you're coming from and what your job description or role actually is. But the efficiencies that can be driven there, if you understand the process and what you're actually trying to get the technology to do, I think is critical. And you take your reputation in that they can be very useful, but don't expect them to give you a completed solution to a problem. You still need to have the technical nous in the background to be able to identify whether it's complete and correct. It may be that something that GPT has put out is somewhat correct in a particular context, but is it actually fit for purpose for what you're you're actually trying to achieve? So those types of things, I think is where technology has a place and will continue and obviously I will continue to get better and better, one would assume. But the real skills that I experienced and keen tax professionals have, that'll be very difficult to replace the breadth of what that is. And as you say, Robyn, the ethical dilemmas is often those require a judgment call that is far from easy in many instances, and sometimes you need to to discuss that with others and take on board different views to come up with a solution to a potential problem. And a lot of people in the world of tax, the role could probably be more aptly described as a problem solver rather than a tax person. And and problem solving requires the same core process, irrespective of whether it's a tax issue or an ethical dilemma or whether it's something you're trying to as I've been doing, trying to fix around the house a few DIY problems and whatever else. You've just got to come up with solutions using a process to get there. So I think technology is something that 2024 is. Technology's only going to become more powerful, but people need to understand their process and make sure they've got an efficient process because the old adage of garbage in, garbage out probably still applies pretty well there, that you haven't got the right systems and processes you technology's not really going to help you in the way that you perhaps think it will.

Robyn Jacobson

Be also important to check the veracity of what it is you are reading that is produced by a I heard of a lawyer who was provided with some research and the precedents that were discussed in this research were compelling and persuasive, and it was all very well put together. And of course he did his proper due diligence and make sure that he checks that this was all correct. And the cases that had been described in this artificial, the intelligently produced document was in fact all made up. It isn't going to be just because you're provided with something from the computer. A computer may not be correct.

Todd Want

Well, that's one way of supporting your technical arguments with things that exactly fit the fact pattern not even led to a good story in the way the truth has.

Robyn Jacobson

So moving into our space, looking at what's on the radar from a tax perspective in 2024, it's a most dominant discussion at the moment and not just because of the time frame coming up. We have, of course, got the federal budget and it's this annual gathering. I'd describe it nearly as the most exciting night of a year, where, of course, at the Tax Institute. We all get together, we spend the night poring over the budget papers and producing reports and summaries and and videos, etc. for our members in the broader profession. But it is the 14th of May this year scheduled at this stage, and certainly the focus is on the stage three tax cuts. So it's worth making the point that these were legislated back in 2018. It was a three stage approach stages one and two were deliberately targeting the lower and the middle income earners first. And it was always intended that the stage three tax cuts delayed until 1st July 2024, would target the higher income earners. Now, in order for them not to proceed, the government would need to change the law. So they need to get the support of the Parliament to actually put some amendments through. We will watch and wait with great keenness over the next few months to see how this plays out. And I am not interested particularly in getting into the political arguments here, but certainly it is dominating headlines and cost of living Relief is something that the government has undertaken to provide in the budget. Your thoughts on this?

Todd Want

I think, Robyn, you've got obviously, as you mentioned, this was legislated a number of years ago, so this is not something that requires a budget and in future passing of legislation, it is locked in. So there would have to be superseding legislation to go and change those tax cuts. What we've probably got is the fact that we're not in that extreme deficit position that was perhaps forecast as little as a year or two ago, largely because of the natural resource prices and the strength of the tax, the inflows that are being coming in. So I think that means that it perhaps is the ability to have the stage three tax cuts just continue to to to flow through and happen in six months time when they're meant to kick in, but also provide some cost of living relief for those lower income to middle income earners who perhaps are finding it tougher. So it's something that I think the federal budget, as you say, it's a really exciting night for tax person. And reading through it, I'm not going to sit here and lie about that. It's interesting whether there is a lot of changes or whether there are not and the speculation around why or whatever. So it so I think I think it would be nice, obviously, irrespective of political party to see some bold tax measures. But I think the the budget position being where it is, there probably is some room for them to provide certain reliefs there perhaps that weren't as readily available without going into even bigger deficits, as I say, because of those natural resource prices and that type of thing that has assisted.

Robyn Jacobson

Yeah. And we are in the process of preparing our pre-budget submission. So this is an annual process. Again, the government calls for this each year and we are gathering feedback from our members and I'm putting this together to let the government know what our thoughts are on what they should do in the budget.

Todd Want

That's right. And I think we we're always looking to to make sure that the tax system is fit for purpose. And and some of that involve measures that are a bit more future looking rather than perhaps political type measures. And so I think trying to find the right balance and putting it forward to the politicians to to make sure they're at least considering some of the things that we believe as an institute and as a tax community are worthwhile to consider.

Robyn Jacobson

So perhaps my tip to those who are interested in budget night, cancel all your social engagements unless you're going to spend the evening with an accountant or a tax lawyer. Or do you pizza and settle in for an interesting evening?

Todd Want

I think the pizza delivery companies and the different pizza companies, that must be a real kicker for their not that they now would know that it's the accountants and the tax professionals that are are ordering big from that Tuesday night each major.

Robyn Jacobson

All right. On to another really significant development for those in the assembly side of things. We had a tribunal decision last year. And when we look at the decisions that come out of the Administrative Appeals Tribunal, which by the way, is in the process, of course, of being rebadged and redesigned as a new administrative review tribunal, that's not going to come further on down the track. We've got a decision that deals with unpaid present entitlements. Now, you and I and and of course, members of the profession have been talking about EPAs for about 15 years now. So it's 2009 and that particularly came on the agenda. And all these years we've been having debates about whether or not a an entitlement that is made from a trust to a corporate beneficiary is in fact a loan for divisions that repurposes. We've had various forms of ATO guidance. It's been reshaped and it's shifted and it's adapted and been extended. And I won't go back through all of that guidance that has been issued. But this decision Bindal has certainly grabbed our attention and it is now on appeal to the Federal Court. Perhaps. Can you describe a little bit more about the case, why it is so interesting to us and what it could mean if indeed having had a culture that cost the taxpayer win in the tribunal. The tax office has appealed this up to the federal court. So what happens next?

Todd Want

This is certainly one of the biggest things in the SME tax base for 2024 of them. There is no question about this, because for as you mention, this past 15 years, we've all been having to focus on distributions from trusts to corporate beneficiaries and how to deal with those distributions. Do they need to physically be paid in previous years? Could they be put on sub trusts, interest only facilities, all sorts of things like that? This decision certainly I won't say it flips that on its head, but it certainly brings the technical issues to the forefront and something that a lot of people are probably saying, Well, why has it taken so long to get here? These technical issues we've had the ATO's view for for well over a decade now or their broader view that's evolved over time there. But practitioners have had to either put their clients and themselves potentially at risk if they're taking a more aggressive approach or take them, perhaps what some may say is the more conservative approach consistent with the ATO view and paying those distributions through to corporate beneficiaries or putting them on Division seven, a complying loan arrangements, that type of thing. So this issue I think will be fascinating is to where the Federal Court decision goes. And if it goes in favor of the taxpayer, do we see legislative change? Do we see it reached the high court? If it goes in favor of the tax Office again, do we see it going to the high court? Where does it go? But probably more broadly, what does this mean for distributions in recent years where people are having to either clients or their advisers assisting them in making decisions on what do they do with these distributions from trusts to corporate beneficiaries? What does it mean for tax planning for 2024 for the June 24 distributions? And I think it's probably too early right now to make a definitive call on what people should or shouldn't do. But unless we get a decision over the next few months, which probably may take more time than that, they probably do have a really interesting next few months as to, well, will some clients push for their advisors to say, Hey, can we take a more or less less conservative approach this year than what we did previously? But does that come with a risk that if the Federal Court decision is in favor of the commissioner, what does that mean for those distributions? So I think this is a really interesting in the tax planning space and also the use of trusts where we've obviously had a whole range of trust related matters in focus over recent years. This one was one that had once it died down, but it certainly has not necessarily been the focus until the BENDALL decision came out. And now I think it's going to be a fascinating year on this front, Robyn.

Robyn Jacobson

It's important to remember this is an administrative decision at this stage. So in other words, when the tribunal makes a decision, they're not changing the law. They are simply standing in the shoes of the commissioner and remaking the decision that he's already made. But in this case, it was different to, of course, what the commissioner had decided when it goes to the federal court, or it could, in fact, go straight to the full federal court, we will have proper case law. And then, as you say, it's a case of whether it gets appealed further up to the high court. Also, I've referred to prior years in question. So, for example, if there was a UPC in June of 2022, it is now that the trustee and also the advisors are going to have to think about, well, how are they going to treat that? They go back to, for example, a distribution made in June of 2022 in that would have become potentially a loan by lodgment of the 22 return. So sometime in early 2023. And then if it is indeed a loan, it would need to be managed by lodgment of the 23 return of the company, which is roughly right of this year. So there may well be a reasonable approach where people are focusing on distributions made in the 24 year given we've now got Bendall in play. But in fact it could be 22 or 23 distributions that are actually affected at the moment or will be certainly by lodgment day this year or looking at June 30 this year. So as you say, we don't need to do anything right now. But I would hope in the months ahead that we would see a little bit more guidance from the ATO on what practitioners can do. They have already issued a decision impact statement in an interim form back in November last year. So perhaps they won't issue any further guidance beyond that where they stated we will stick with our current position until we're told otherwise by the court.

Todd Want

I think I think you're right, Robyn. This is yet another area where practitioners can't necessarily give a definitive answer to their clients on what they can and can't do, but more a position as to, well, this is where the whole matter sits at the moment. These are the options you've got. These are the potential downsides and upsides to each of them and making an informed decision or advising their clients or the client to make an informed decision based on where they wish to go. It is one that hopefully we do see this federal Court decision and if it does proceed that far, the High Court decision and get a bit more of a definitive set of ground rules as to how to manage GP's with corporate beneficiaries. But in the meantime, just another one of the areas of tax where we're all sort of sitting there looking forward to to where this takes us.

Robyn Jacobson

We should get our popcorn and sit and watch and play out.

Todd Want

Said like a true tax person. Robin But it's certainly not going to get me disagreeing on that.

Robyn Jacobson

Now, very briefly, the multi national package, there's a bit going on in this space, so can you just briefly run through some of the key points that this particular package is looking at? Because we know that people like to have a go at the multinationals and say they never pay enough tax. In fact, they are one of the best tax payers in terms of the gaps, the difference between what they should be paying and what they do pay. Nonetheless, we've had some fairly significant tax measures come in in the last decade and we've got some tightening up of some of those rules.

Todd Want

Look, we do, and I think this is where the multinational area continues to be a focus and continues to be one where the costs of complying or the technical issues just keep growing. In this instance, things like thin cap anti-avoidance rules for denying deductions, for certain payments relating to intangibles where they're related to a low or no tax jurisdictions, reporting requirements to enhance tax disclosures, debt deduction creation rules. There's a whole range of things that they require, not just necessarily an Australian coordinated response, but also knowing the broader group that an entity might operate as part of. And and that's certainly something that for multinationals, be they smaller multinationals in Australia, larger ones, it can touch these things can touch a whole range of businesses that operate cross-border. And I think that's where these packages and the issues where the Bendall type case may have been something that the SMB area, it's a hugely important thing. I think those who practice in the, you know, the larger end of town or the cross-border type in these multinational things and the continuing evolution of packages relating to multinationals and tax issues, there, this is just going to be another year where there's more measures that keep tightening things and requiring a very robust compliance approach for taxpayers and also a robust set of planning to to manage the issues so that it is not inadvertently achieving unintended poor outcomes for taxpayers.

Robyn Jacobson

Heading back to the ATO and away from Treasury, we've seen a firmer and quite definite shift in the approach taken by the regime when it comes to debt collection. So we know that during the pandemic they were going really softly and gently with businesses they didn't want to send them under and we had payment arrangements being offered and we had remission of the general interest charge. We had, if you like, a holding on things like garnishee notices and those sorts of things or actions. But all this has cranked up, including director penalty notices. So again, as a practitioner, what are you seeing out there? What are you hearing and how do you think this is going to play out when they've got still a very high level of collectible debt going by, in particular, small businesses?

Todd Want

Look, I think it is one problem where the government probably needed to go back to business as usual on debt collection, that it was very carefully managed by the tax Office during that COVID sort of period and trying to to give businesses the best chance to survive through that period and come out and and continue on. But the sheer size of the the debts that are sitting there, it's just massive. And so people who genuinely need some assistance and some time to pay it off, making sure that they get that time and assistance from the tax office is important. But equally, those who will never be able to pay it off, Unfortunately, the decision does need to be made and sort of making sure that those debts are managed appropriately because we can't just have debts continuing to balloon know forever. Ultimately, they do need to be paid or managed. And so I think it is going to be a year where because we have had interest rates increase, debts will grow a lot quicker just because of the interest component adding on top as well. So the ability to manage some of these debts will continue to be harder for those who don't have the cash flow and don't have the ability to pay it off. So speaking with an appropriate advisor in that area is probably quite a useful thing for those businesses who are just not sure whether they've reached a point where it's actually their debts too big or how best to manage it.

Robyn Jacobson

To put some figures to the large amounts you're referring to in June of 2019. So about six months out from the pandemic, we had collectible debt at about 26 billion. Now that increased 89% to June 2023. So over a four year period to more than 50 billion and about 33 billion of that is owed by small businesses. So it is disproportion that given the contribution and and the extent to which we have small businesses in the economy, given of course the turnover in the tax they pay. So it is a concern that that collectible debt has gone up. And I'm not talking about debts that are collectible. These are amounts which are regarded by the ATO still being recoverable.

Todd Want

So it's a big number and I think of that number, there's a lot of them that will have just needed some short term breathing space. Others where perhaps they are using the tax office as their pseudo bank and perhaps that's not the right mindset to have and actually coming up with a payment arrangement that they can manage, that they can work with and that chips away at the debt over an appropriate time frame is really important. So picking up the phone to the Tax office and having a chat to them about it in equally the Tax Office hopefully being reasonable in setting it a payment arrangement that will work in a sensible timeframe.

Robyn Jacobson

Many of our listeners may be aware that there was an announcement in the Mid-Year Economic and Fiscal Outlook in December which announced the Government's intention to make general interest charge and the shortfall interest charge, which is a lower rate nondeductible from I think it's 1st July 2025. So this is something that will have a quite a big impact because there may be businesses that have debt, but the way they're prepared to manage it is, yes, we know it attracts interest, but at least that interest is deductible.Once that deductibility is taken away, then it becomes a much more significant cost to have an outstanding tax debt.

Todd Want

There's no doubt about that, Robyn. And I think it's yet another measure that's encouraging people, whether it's with the carrot or the stick, to to pay their tax office debts and make sure that they're up to date with those. So it is something that for those businesses that are paying their debts on time, there's an element of probably fairness to them for those who are not, it's an increased cost that suddenly they're having to pay their tax office debts and that interest not being deductible increases the cost of that debt. And it is one of those things that will focus the need for some businesses to make some hard decisions on how they get themselves out of this into superannuation.

Robyn Jacobson

Two major reforms, proposals, measures on the horizon, and one of them's a little bit closer than the other. We've got a bill before Parliament currently which is due to commence and take effect from one July 20, 25 in the tax world as boffins call a Division 296, because that's where it sits within or will sit within the 97 Tax Act. But in layman's terms, this is the additional 15% tax on earnings from superannuation balances above $3 million. Now there may be many out there who say, I wish I had $3 million in my super fund, but for those who do, this is certainly going to be a significant change. Now, most across the profession agree that if the Government wants to increase the tax rate, not only is its prerogative, but those sorts of policies come and go all the time. The biggest noise we're hearing around this particular policy is about the proposed taxation of unrealized gains encapsulating those earnings. Again, your thoughts?

Todd Want

It's absolutely right, Robyn, that taxes, tax rates go up and down forever in a day when there's been a tax system. But the taxing of unrealized gains, that's the big one. That's the really big one here. And I think, you know, some of the concerns from people that, hey, I'll be taxed on again that's unrealized that I may never realise. So I'm paying tax on an amount that I never actually Kit And where's the fairness of that and the appropriateness of that? And I think that's the discussion and the real issue that a lot of people are finding very, very tough to to get their head around. And I think probably more broadly making sure that if this does come in as a measure, that it doesn't spread out into other parts of the tax system and suddenly become a norm across other areas, because we don't want this to create a precedent in that regard because it suddenly it will fundamentally change behaviours. And is all of it a good change to behaviours or not making sure that superannuation system and the cost to the tax system that superannuation has is sustainable into the long term is an important part of government decision. There's no question around that. But dealing with it in a fair and reasonable manner and taxing unrealized gains, is that fair and reasonable? I think that's where a lot of people are finding this one particular challenge. So how do to nine six evolves will be an interesting one. And obviously we will have a federal election between now and when that kicks off. So will that become an issue from a political point of view leading into the next election? Who knows?

Robyn Jacobson

My explanation for of in layman's terms, is instead of using a profit or loss statement, which is actual earnings of the fund for that particular member, they're instead using a movement in balance sheet approach. So the balance in your superannuation accounts and unfortunately the balance in your superannuation account is the unrealized gains that are embedded in these assets and that's what they're effectively going to be taxing. So that's why we're keeping a very close eye on this. The other measure, which is a year later, one July 20, 26, but no less significant, in fact I would suggest this has much broader application is what's called Payday super. And we're going to see a requirement of all employers at this stage. There is no carve out no de minimis rules where employers will need to pay the superannuation guarantee at the same time that they pay their salaries and wages. The Tax Institute and and in particular my self has been directly in targeted consultations and having sat through a number of these meetings and I'll say that many of them have not been confidential, so I am afraid to discuss this with you now. It's been very pleasing to see the collaboration, the openness to ideas, the tabling of issues, thinking through all the aspects, all the different stakeholders. It's not just a change in timing of payment. It's going to affect the onboarding of employees, the gathering and sharing of information, the development of reporting systems, how the ATO ascertains, whether there has been in fact a shortfall. It's going to necessitate a whole design redesign of the guarantee charge. So when we look at this current 11%, maybe 12 and a half, eventually to 12%, it's not just that the charges impose, but all the draconian penalties that come with it and that currently operates on a quarterly basis. So to start moving it to a weekly or fortnightly does need a rethink. So without going into any more detail, I see this as a golden opportunity to bring this very archaic regime, very necessary, but the regime itself is over 30 years old and bring it into the 21st century. From your client's perspective, are they going to welcome this? Is this something that they are going to be concerned about? Where does the business community sit on this?

Todd Want

Look, I think the vast majority of businesses do the right thing by their employees and they genuinely pay the right amounts of their wages, withholding, super, all that sort of thing for their employees, pay them their wages, comply with their SGP and other obligations. And so this will probably from a compliance point of view, be more of a cash flow type thing where it's a managing cash flow there at the moment they may be paying the super quarterly. This will require it to be paid earlier and in, you know, perhaps more bite sized chunks. But that cash flow change will be important for a lot of businesses. The degree that that interacts with. If you look at the size of the ATO debts there, that the sheer growth in the size of that, that's probably indicative of how tough some businesses are finding the cash flow at the moment. So is this going to be another thing that weighs on cash flow for businesses and creates bigger problems there? That's a question that I think needs some more delving into. You know, there's a whole separate issue there, but I think you're quite right, Rob, And the ESG penalties, the broader rules around super and the mischief or non mischief and the degree of a penalty when a business has genuinely tried to apply with their obligations but perhaps has an inadvertent error or mistake there and is the penalty that they cop for that fit. So what has actually occurred? I think it's the right time to relook at all those things. And so I'd love to see a broader piece here. And we've got time that these measures are not proposed to apply for well over two years. So I'd love to see that. And it's refreshing to hear that there is genuine breadth of consultation ideas, thoughts coming together, and hopefully we land on something that's user friendly and able to manage things appropriately.

Robyn Jacobson

We would certainly want to see a much more proportionate penalty so that if you one day like this is someone who never pays on behalf of their staff, they are treated differently and as they should be.

Todd Want

As you mentioned, Robin, with super heading to 12% for ESG and it started at a much, much smaller number than that many years ago with the cash flow impacts the the quantum of the penalty because of how it's calculated, it suddenly can become a very big number. So we need to make sure that it's fit for purpose.

Robyn Jacobson

Now, turning to the integrity of the tax profession, I know that we can speak for a long time on this alarm. We ran a webinar for our members, which is available on the member portal at the end of last year. So if members want to go and look at that from the Tax Institute, they can delve into it in much more detail. Very broadly. We've got some major legislative changes coming in affecting the regulation of tax agents and best agents. Some law has been enacted, some is before Parliament, some is still in the pipeline. So there are quite a number of stages being rolled out at an overarching level, the approach to this, it's certainly appropriate to look at improving the integrity of the system, but at the same time it is also valid for genuine concerns to be raised about the design of the provisions.

Todd Want

That's right, Robyn, And I think that's we fully support that. The Government wants to ensure that there is a high degree of integrity in the tax profession and that the profession does engage in ethical conduct. I don't think there's any issue with that. I think the vast majority of tax practitioners do operate in an appropriate manner and they are fully aware that society should hold them in high regard and they want to be held in high regard as someone that can be trusted to act appropriately, ethically, with a high degree of integrity, where, yes, they are looking after clients and taxpayers, but they are doing so within the bounds of the tax laws in an appropriate manner. So, yes, some have overstepped the mark, there's no question about that. But the response needs to be commensurate with that. Those who are operating at the fringes or even well outside the fringes, they should be dealt with appropriately. But we need to make sure that the measures here don't lead to the everyday client being unable to access tax advice and assistance because of cost effectiveness or that sort of thing, because tax practitioners are so burdened with the red tape or the regulation they need to go through to just be able to get a client on board. It ought to be able to document things or deal with it and so on to be able to give advice to clients. We've got to find the right balance there and make sure that we don't price the everyday Australian out of getting good quality tax advice from a tax agent and tax advisor. But we need to manage the integrity of the tax profession and ensure that tax practitioners do act ethically and do act in a way that is where the community expects that practitioners should be operating.

Robyn Jacobson

Finally, your vision as president. So you've got a year ahead and we've probably got you at the commas point of view a year. It's only going to ramp up from here and you will of course be traipsing around the country, going to lots of our events and other activities and meeting with members and looking at our advocacy work in terms of looking at submissions and so on. What do you hope to get out of the year for the Tax Institute? What direction do you want to take instituting and where do you think our focus will be.

Todd Want

As an institute, I want to make sure that we have got the, the offerings that are right for our current and future members that we're bringing through the next generation of tax practitioners. And that can be a broad range of things. You know, if you look at something like our Tax Academy that's just recently been launched, they bite sized chunks of micro credentialed learning. That is a fantastic set of tax learnings there where you can take the opportunity if you're a novice in the world of tax to upskill, if you're a strong, experienced practitioner but want to upskill or refresh in certain areas, you can take some bite sized chunks of learnings out of that. It's technically very strong, it's practical, great set of things there. So Tax Academy is something that we've built to help that be the way that people want to learn bite sized chunks on the go. But for a breadth of people who it's not just aimed at the novices or the experts, it's for everyone. As you say, Robyn, I'll be going around the country. I'm really looking forward to meeting members around the country, hearing what they've got to say, helping advocate for the issues that are affecting them and also taking the tax profession forward in an appropriate manner. I think one of the real strength of the Tax Institute is the sharing of knowledge, the experience and the skills. And I think that's something that we need to make sure is fit for purpose moving forward. As to how that is, we run some fantastic events where our presenters freely give up their time to both present on the day, but also write their papers, share their knowledge and skills and put back into the tax profession. And that's something that I want to make sure that our tax community continues to work together to pass the baton on to the next generation, but also help design a tax system that's fit for the future. So advocacy sticking up for the tax profession, not just providing, you know, one sided views, but a balanced consideration of what is good for the tax profession, also for members raising issues that and obviously for for part of your role, Robin, is taking forward issues that members might have and helping them get those resolved if they've got issues along the way. So supporting our members, our practitioners, our tax community to really make sure that as a profession it's an attractive profession to be part of. It's an interesting and exciting one. It's a fulfilling one and that it's one that we are fit for purpose for the future. So I want to help take the tax profession, the Tax institute forward. And that's that's something that really excites me. So I'm looking forward to 2024. Robyn I'm looking forward to working with the team at the Institute. I'm looking forward to working with the members, with the broader tax community to be able to achieve a lot of things this year.

Robyn Jacobson

Well, thank you, Todd. On behalf of the staff at The Tax Institute and all of our members and the broader profession, thank you for your commitment over many years. You don't just become president overnight. It's many, many years of voluntary work up through our working groups and committees and state council and then on National council. So congratulations again on your appointment as President. We look forward to your energy and your your drive and the vision for this year. And let's roll up sleeves up and get into the work.

Todd Want

Thanks, Robyn. I think it'll it'll be a cracker of a year for, for the world of tax and I'm looking forward to it.

Robyn Jacobson

Terrific. And thank you also for your time today.

Todd Want

Thanks, Robyn.

Robyn Jacobson

Thanks for listening to this episode of TaxVibe. I've been chatting with Todd Want, CTA, President of The Tax Institute and Director, Tax Services with William Buck in Sydney. If you've enjoyed this episode, we'd love for you to subscribe, rate and review TaxVibe wherever you listen. We welcome any feedback and suggestions. To catch all the latest from TaxVibe and The Tax Institute join us on LinkedIn. If your interested in being at the center of the tax conversation. A membership with The Tax Institute could be just what you need to stay current and connected with tangible real world benefits. Learn more at taxinstitute.com.au. Thanks again. Till next time on TaxVibe.

Shifting tax payment culture for taxpayers and employers

Release date: 17 November 2023

In this episode of TaxVibe, Robyn Jacobson, CTA chats with Vivek Chaudhary , Deputy Commissioner, Lodge and Pay, at the Australian Taxation Office, about the ATO’s approach to taxpayers’ lodgment and payment obligations, and the shift in payment culture, from the anomaly that was the pandemic, and how things need to change in the future to ensure a fair tax system for all Australians. 

Host: Robyn Jacobson, CTA

Guest: Vivek Chaudhary, Deputy Commissioner, Lodge and Pay, ATO

Robyn Jacobson

Hello and welcome to TaxVibe, a podcast by The Tax Institute. I'm Robyn Jacobson, the Senior Advocate of The Tax Institute and your host to today's podcast. We love the vibe of tax and here at the Tax Institute, we do tax differently. I'll be chatting with some of the tax profession's great thought leaders, who will share valuable and practical insights you may not hear every day. We hope you enjoy this episode of Tax Vibe. I'm joined by Vivek Chaudhary, Vivek joined the ATO in 2019 in his current role, Deputy Commissioner of Lodge and Pay at the ATO. He has 20 years of global financial services experience transforming and growing business teams into highly productive operations. Vivek previously worked at NAB and was responsible for transforming its collections function into NAB assist, making NAB the first Australian company to make the Fortune's Change the World's list in 2016.  Vivek has reshaped the ATO's approach to lodgment and payment obligations to one that focuses on tailored solutions based on a deep knowledge of the client's circumstances and behaviors. Vivek, welcome to TaxVibe

Vivek Chaudhary

Thanks, Robyn. Thank you for having me here today. Yes, at the recent Tax summit, I spoke about how the ATO is returning to normal operations to address collectable tax debt, and I look forward to discussing that with you here today.

Robyn Jacobson

Yeah, that's great. We know the ATO had a very different approach during the pandemic. Not only were you handing money out through things like job keeper and cash flow boost, but the very supportive approach in terms of remitting GIC and other penalties and payment plans and so on. But we are now in a situation where debt has increased and we do need to return to a business as usual type approach. But we also know that there's been some observations made out in the community and in the profession regarding the ATO’s changed approach. So I look forward to unpacking this with you. So at the Tax Institute's recent tax summit in Melbourne, you recently outlined the shift in the ATO's approach to addressing collectable tax debt. Would you give us a brief overview of what you provided in your address?

Vivek Chaudhary

Sure. Through the pandemic, we shifted our focus from debt collection to stimulus payments and assistance with tax. We redeployed over 5000 staff and turned our attention to focus on how we help and assist taxpayers. As part of this, we paused most of our firmer debt collection actions, which was appropriate at the time, and we encourage taxpayers to lodge even if they couldn't pay. We offered payment plans deferred due dates and as you mentioned, remitted penalties and interest without question. Offering additional time to pay was an effective lever to help small businesses stay on track. And a large portion of the tax bills were paid before those deferred due dates. This was the right thing to do for a lot of businesses and it delivered many successes. But it has also had an impact on payment culture. And we are seeing more businesses not paying tax on time since before the pandemic began.

Robyn Jacobson

So Vivek, do you think there's a bit of change in approach? People have got used to those supportive approaches from the ATO and they've taken that into a post-pandemic phase?

Vivek Chaudhary

Some businesses, yes, are probably have changed their habits for the worse, but the vast majority of the system continues to operate at good health. 70% or more tax obligations are met on time and the vast majority of tax liabilities are paid on time. And our concern is for those that are doing it tough, but yet paying taxes on time, it makes it unfair for them that some others are not. And that's why we are changing our approach. Otherwise it remains something that is growing at an unsustainable level and may get out of hand.

Robyn Jacobson

So what are you seeing out in the market and in the community?

Vivek Chaudhary

What we're seeing is that too many businesses have accumulated unsustainable levels of debt and we also see a number of profitable businesses who have the capacity to pay their bills but are choosing not to. Over the past 4 years, collectable debt has increased 89%, and now we do feel it's the right time to reestablish that culture of paying taxes on time and turn this trend around. Where we see businesses are behind with tax, there's a fair chance that they are also falling behind in payments to creditors, suppliers and even their employees, which isn't good for those that are directly impacted. It's not good for the system and it's not good for that business itself. We do know that many people are facing cost of living pressures right now, but we also know that the community expects all taxpayers pay the right amount of tax and pay it on time. And the ATO has a critical role in protecting not just the revenue but also the taxpayers themselves from creating too much debt and from impacting their creditors or the broader economy.

Robyn Jacobson

So can you provide an example of what you're seeing out there.

Vivek Chaudhary

Obviously I cannot talk about individual taxpayers, but I can tell you if and this is a recent real life case and something we do see more often than we would like to, the case concerns a smallish business, one that had quite a few staff, customers and suppliers. The business was impacted by the pandemic due to the lockdowns, but also other factors that resulted in the business started to pay late and our response was to support them with payment plans and other support options and ones that were supportive and gave the owner some breathing space. It also meant that the business owner was not forced to face what the business was and some of the habits that were not in the best interest of that business were formed and they weren't forced to think about their pricing, whether they were too reliant on debtors who were paying late or might be in trouble themselves, or whether they needed to slow up their expansion plans. In the end, the business became insolvent and the business owner has now personal debt that are substantial and will probably take a very long time to pay off. But it doesn't just impact the business owner. They were over 150 creditors both businesses and consumers, as well as staff who had not been paid their entitlements, including their superannuation, which is their retirement savings. So in this case there were no winners other than the insolvency professionals. While we can never know what might have happened, we have to think that if we had intervened earlier about the debts they owed to the ATO and their staff, there is a chance that the business owner might have either taken action to set the business on the right course or taken action to close the business earlier, which means less damage for everyone that was involved.

Robyn Jacobson

And sadly that's not going to be an isolated case.

Vivek Chaudhary

There's like I said, there's many more that we're seeing than we would like to see.

Robyn Jacobson

So what are the trends that you're seeing in terms of collectable debt?

Vivek Chaudhary

As I mentioned so the total collectable debt has increased by 89% over the last four years. 90% of the collectable debt, which is $45 billion of it is owed by businesses and small business continues to be overrepresented in our debt book. And so of the 45 billion, 33 billion is owed by small businesses, 23 billion of the 33 billion is unpaid activity statement debt. So this is your PAYGW the withholding from the wages. It's net GST that is collected or adjusted but not paid and it's PAYGI which is based on anticipated profits in the future year. $1.8 billion of this is also superannuation guarantee charge and that has that direct impact on the employees.

Robyn Jacobson

So Vivek, I just want to make an observation. Leaving aside the PAYG instalment, you mentioned then PAYG withholding, GST and the unpaid SGC and all three of those are of course personal liability for directors. So director penalty notices can be issued in respect of those debts. So they're not just business debts. This can actually flow on to be a personal liability of the directors.

Vivek Chaudhary

Absolutely. In fact, the liability exists in a corporate structure from the time someone becomes a director and the director penalty notice is a requirement for the ATO to issue those prior to commencing recovery proceedings is a requirement for us to do that, and that creates an account into their personal tax obligations until either it's paid by the business or by any of the directors themselves. We do as a strategy and a contemporary approach during COVID because we had stopped our firmer actions. As we look to recommence them, we issued awareness letters. So writing directly to directors of these businesses and we had seen some great engagement from many on the back of that awareness campaign. There are so many that at the moment that we do not have the engagement from businesses or their directors and we are continuing to issue director penalty notices to them and collect from those. I want to make a point clear, although small business is overrepresented in the total tax, collectable debt, non or late payment is a focus across the board for the ATO from individual taxpayers all the way to the big end of town. So our expectation is that people will lodge and pay on time and if they are not able to do so, that they will engage with the ATO before the due date, not after the due date. Our expectation is that people engage with us before.

Robyn Jacobson

The point of engagement. So if people aren't in a position to pay, you'd much prefer them to at least come on to your radar and keep up to date with their lodgments?

Vivek Chaudhary

Keep up to date with their lodgments and have a payment arrangement in place. If they do not have a way to enter a payment arrangement, that should be something that they need then to consider whether their business is viable. We would be able to provide them additional time to go seek advice from the appropriate professionals. May that be tax advisors or insolvency or restructuring advisers. But we do not want that they grow the amount of debt without actually having a good understanding of whether they can recover from it. Because I was saying earlier, it's in their best interest to do that, but it's also in the best interest of other businesses that are dealing with them and their employees who we are very concerned about.

Robyn Jacobson

While small business makes up a sizable chunk of the collectable debt. You are still seeing issues across the board.

Vivek Chaudhary

Yes, we are, absolutely. In fact, our focus is not in a particular segment of business. As I said, 90% of the collectable tax debt is from businesses. Our focus is that, particularly for this year in five specific areas, the first one is super guarantee charge so those that have already have a super guarantee charge debt that they have not paid. We have always prioritized these debts. So this focus area is not new, but it's certainly one that we would be keeping on top of our pile of work because it is so important for us to make sure that we can reunite that super to the retirement savings of those employees. We're also focusing on refund fraud. We view that fraud and take it very seriously, that taxpayers who engage in refund fraud that they can expect serious consequences. We have a very clear and deliberate approach to recovering these debts, and we won't hesitate to apply to all of those clients who are involved in this. We will fully extend our stronger powers where necessary, beyond our ordinary posture for these clients. We are also doubling our efforts in the recovery of aged and high value debt. So these are debts that are of high value and aging. The 2023 24 budget has funded a four year program for us to focus on public and multinational groups and privately owned groups that have debts over $100,000 and have been overdue for more than two years. For these clients in particular, that are no concessions available. Debts will progress to firm actions and payment plans will be very limited and for a very short duration, and they will align to the reporting cycle. So what we do want to see is these businesses get back on track and remain on track, otherwise they really have to consider their viability and seek the appropriate advice. There is one more that we are increasing our focus on this year and they are employers with new debts. Our experience shows that ultimately businesses that choose not to pay the employee superannuation, they start by not paying some of their initial obligations, such as their BAS payments, and that includes a PAYGW and GST. And what we are doing is looking at timely action and quick turnaround in terms of these debts. So anyone that employs staff should expect that we will be prompt in taking action if they incur debt.

Robyn Jacobson

Looking further down the track, Vivek of course we've got pay day super which is proposed to commence on the 1st of July 2026. So without getting into that many detail, it's going to be another game changer for employers where it's going to be yet another obligation that they will have to meet at the time of paying the salary.

Vivek Chaudhary

You're absolutely right. In fact, we are actively thinking about how that is not a shock to many businesses. And if we can influence and communicate now to start turning those payment habits and that payment culture, that will mean that when that new legislation comes into place, that those businesses are ready to adapt to that rather than be finding themselves in a state of shock.

Robyn Jacobson

Yeah, that's really important. So why are the changes being made now? You've talked about we're out of the pandemic and the level of debt is not sustainable. So I guess that answers the question. But can you provide a bit more detail around why the changes are being made now?

Vivek Chaudhary

Look, it's essential that we shift payment behavior for the good of the Australian community. We are reaffirming now that our expectations have climbed and resetting what clients can expect of us. And practically speaking, this means that tax professionals and their clients can expect to see us acting earlier than we have been. We know that preventing debt is the best way for businesses to stay on track, and we have seen that leaving debt unchecked and unmanaged for prolonged periods rarely improves future viability of a business. We have a role to play to protect the taxpayers from accumulating debt. That becomes a burden sometimes for the rest of their life. And may impact their family home and those who pay late or do not pay and do not proactively engage will have interest and penalties apply. And we do not want clients to rely on remissions, and we will consider them only in very limited circumstances. But clients who make a choice to contact us early will be best placed to discuss options that are available in early means before missing the due date, not after missing the due date. Certainly not after the ATO has had to chase them. You know, at that stage we would have very limited room for concessions. The taxpayers that are contacting us can expect a conversation about making payment in full. So if we will assess if they have the capacity and we will encourage them to make the payments in full. But if they need a payment plan, our approach will be that it is one that is in the shortest possible time frame and really an ideal payment plan would be one that gets them back to square before their next payment obligation. Like I said before, if there is an inability to do that, that is the time for them to consider their viability in their financial status and position and they should seek advice and that is what we would recommend to those businesses. I do want to make a point about superannuation as well. That is a growing concern for us. It has grown over the pandemic from less than $1 billion to now over $2 billion, and we do review every complaint of unpaid super. We monitor payments to ensure that employees receive the correct and timely amount of super, but we will continue to apply a full range of firmer actions, including garnishee, The Direction to Pay, Director Penalty notices, the disclosure of business tax debt and prosecution actions to ensure payment of super. And we will continue to detect if employers are taking advantage and not paying the relevant entitlements. This is a key concern for us and a key area of focus that we'll continue to look into.

Robyn Jacobson

Back in yourspeech at the tax summit, you mentioned the range of firmer actions, including director penalty notices, DPNs, disclosure of business tax debts and insolvency, and you've just mentioned those again now together with garnishee notices. Would you tell us a bit more about when the ATO is likely to apply these firmer actions?

Vivek Chaudhary

Sure. So over the past 12 months we've started to use more of the firmer and stronger actions, but they are for those who are choosing not to engage with the ATO.  And some of these stronger actions are director penalty notices and disclosure business tax debts, to credit reporting bureaus and the potential legal actions to either wind up a company or bankrupt an individual. There is over $5 billion owed by clients who currently meet the criteria for disclosure of business tax and the signs posts are that this is likely to grow. And what we are seeing is that the disclosing action, it does provide strong incentive for the engagement with the ATO, either when we intend to disclose notice, we see lots of businesses that engage, but then some engage even after they have been disclosed. Since July 2022, over 24,000 director penalty notices have been issued and these are in relation to about 18,000 companies. In last financial year we issued 19,000 intent to disclose notices and nearly one in three clients had engaged with us in response to that entered a payment plan or made payments in full. I think 2000 clients paid their debts in full, that was nearly half a billion dollars that was put back into the system for critical services that was otherwise not being paid. We do know that not all businesses are viable in having a tax or super debt is often a symptom of insolvency. And you would have seen there’s a lot of media currently that insolvencies are on the rise after a slowdown during the pandemic. We are a party to many insolvencies and we are often a major creditor. Generally, corporate insolvency action is initiated by the directors themselves or by other commercial entities. ATO initiate one in six insolvencies. So we’re not a major initiator of insolvencies. In terms of timing, I think more businesses who remain disengaged can expect these actions. And like I said before, we are also looking to bring forward the timing of these. So, for example, employers who are choosing to not pay their activity statement debt they will see quicker action that includes disclosure and if their debts are greater than $100,000, that disclosure of business tax debt will be quite timely in those cases. Finally, I would also say that the disclosure of business tax has been a reasonably new provision in the suite of actions that the ATO has and we've completed now the full system implementation of all the letters that have to be issued and the exchange of information with the credit bureaus. And that means we will be clearing up a backlog of many businesses that are already eligible or were eligible for some time before the system implementation. We have now written to over 15,000 of these businesses and in the month of October, if they still remain disengaged, that we're likely to disclose them.

Robyn Jacobson

The winding ups that you take through the Federal court, what's the trend you're seeing here?

Vivek Chaudhary

Normally we wind up pre-COVID about 1000 companies in a year roughly. During COVID that had significantly reduced due to our approach in the last six months that's about 500. So, we are sort of back to our pre pandemic levels and in the most recent month of July, we had about 100 wind ups initiated. So that kind of gives you a sense for we're back to normal levels and these are the levels that we expect to maintain. In some months they may go up, they may come down in another. But overall, go back to the same levels.

Robyn Jacobson

You’ve made some recent comments about the need for a collaborative approach to shifting the payment culture of predominantly the business community, but also individuals. So why do you see tax professional's contributing to this change in culture and the role that they play in terms of fitting this alongside the other pressures of their roles and there are many of them out there, including ongoing labor shortages?

Vivek Chaudhary

So we are very conscious and aware of the pressures everywhere in business as well as businesses that are professionals. And our aim in shifting our approach is to position businesses to avoid falling behind in the first place and position them to better be able to recover if they have fallen behind. As trusted advisers for their clients, tax professionals can help their clients avoid bill shock by setting up good habits and see them put aside the money that they have collected or withheld from others, so they can pay it when it is due. And tax professionals can reinforce that their clients are only the temporary custodians of GST, PAYGW and super guarantee, it is not theirs. Professionals also know the time when a business is struggling on the brink of insolvency or perhaps needs to be told the time has come to exit gracefully. Having these conversations at the right time rather than clients waiting for us to take action will ensure that they are best placed to manage their bills, avoid actions that may have more lasting effect. We also encourage professionals that their clients and to their clients that they talk to each other. And particularly if someone is experiencing financial difficulties, they need to contact us as soon as possible so we can provide them with support. And we do appreciate that tax professionals are busy and that helping their clients with debts will take more time. And to save some of the professionals time, we will increase our self-serve payment plan threshold in November this year from $100,000 to $200,000. And what that means is that more clients can be put through that self-serve online option. But I must emphasize that this is for those who have capacity to pay in full, should still pay in full rather than enter a payment plan. We have also heard from tax professionals the feedback that our calls can sometimes be untimely. We don't allow people to prepare for a conversation and that results in a game of telephone tag. And what we are making now is appropriate adjustments and have recently implemented a change to streamline our lodgment and payment interactions. When we are unsuccessful in a phone conversation, we will send a practice mail through the online services for agents platform and that will allow the agents to contact us back at a time when they are prepared to talk about the matter and have their client's instructions on hand. So we hope that some of these things will help reduce the pressure on the tax professionals. But we do think that it is a collective role for everyone to influence what is best for the broader system.

Robyn Jacobson

You mentioned the increase this November of the self-serve payment plan threshold to $200,000. That's a permanent increase in that threshold? It's not a temporary increase?

Vivek Chaudhary

Our intention is to keep it at 200,000. That said, I cannot predict the future. It may be more suitable in the future to increase it. It may be suitable to reduce it. We don't know that today, but based on what we are seeing and the value of money itself continues to change. So the $100,000 threshold was set up quite some time ago. We do think that the $200,000 is an appropriate setting for now, but yeah, we do not have an intention for it to just be temporary. So that should remain in place.

Robyn Jacobson

So what is your final message or key takeaway for our listeners today, for those who have tax debts, it can be an incredibly challenging and difficult time, very stressful but there’s obviously ways that they and tax professionals can work with the ATO. So what's your takeaway for those who are listening?

 Vivek Chaudhary

Thanks, Robyn. My key takeaway is it is essential that we shift the payment culture for the good of the Australian community. Australia needs all taxpayers to pay the right amount of tax in full by the due date. It's also crucial that employers withhold and pay their employees correct pay as you go withholding and super. My final message is that tax professionals, as their trusted advisor help their clients understand that it's in their best interest to pay on time and engage with the ATO rather than waiting or having the ATO reach out to engage with them. And I do want to acknowledge the role that the Tax Institute plays. And Robyn, you fearlessly advocate for your members and your sector, but also I think really contribute in a very positive way to the overall system operating at help and building it better for the future. So I do want to take the opportunity to acknowledge that and thank you for having me here today in your podcast.

Robyn Jacobson

Thank you, Vivek and very much appreciate on behalf of the Tax Institute your comments and your feedback. We obviously represent the tax profession and our members, but we're also so dedicated to improving the tax system overall and whether that's tax reform and the development of policy on the Treasury in the government side of things, or whether it's tax administration in working with you and your colleagues. So thank you. We all want a better system that serves all of Australians. So I really appreciate your time today. It was very interesting to hear your address at the tax summit and for those that want to go back and look at formally your address, it is available on the ATO website in the media section. But thank you again, Vivek.

Vivek Chaudhary

Thank you very much.

Robyn Jacobson

Thanks for listening to this episode of TaxVibe. I've been chatting with Vivek Chaudhary, Deputy Commissioner Lodge and Pay at the Australian Taxation Office. To keep up to date with TaxVibe, be sure to subscribe, rate and review wherever you listen to your podcasts. If you'd like to connect with us, you can find us on socials. Not a member of The Tax Institute? Join a collective voice of 10,000 practitioners at the heart of the profession and find out what the best tax professionals have in common. Visit taxinstitute.com.au. We look forward to you joining us next time.

Improving the administration and integrity of the tax system for all taxpayers

Release date: 27 October 2023

If you’ve ever wondered who conducts independent tax dispute investigations for taxpayers and is committed to ensuring the tax system is administered fairly, equitably and transparently, you’ll want to hear this!

In this special episode of TaxVibe, recorded in person at The Tax Summit 2023, Robyn chats with Karen Payne, Inspector-General of Taxation and Taxation Ombudsman, about the office and role of the IGTO. This is a rare opportunity to hear about the work their office undertakes to support the tax profession and taxpayers.

They discuss current reviews and investigations, how the IGTO works to improve the administration and integrity of the tax system, and their important role in ensuring accountability of ATO decisions and actions. 

Host: Robyn Jacobson, CTA

Guest: Karen Payne, Inspector-General of Taxation and Taxation Ombudsman

Robyn Jacobson

Hello and welcome to TaxVibe, a podcast by The Tax Institute. I'm Robyn Jacobson, the senior advocate at The Tax Institute and your host of today's podcast. We love the vibe of tax here at The Tax Institute. We do tax differently. I'll be chatting with some of the tax profession's great thought leaders who will share valuable and practical insights you might not hear every day. We hope you enjoy this episode of TaxVibe. I'm joined by Karen Payne, Inspector General of Taxation, the Taxation Ombudsman. Karen was appointed the Inspector-General of Taxation and Taxation Ombudsman and commenced a five year tenure on the 6th of May 2019. She leads the Taxation Ombudsman Complaints Management Service for Taxpayers and Adviser’s and the Inspector General of Taxation is review and public reporting function, both of which are directed at improving the tax administration system for all taxpayers. Karen was previously a member of the Board of Taxation, as well as the inaugural CEO of the Board of Taxation. She was formerly a partner with Minter Ellison, specializing in corporate and international tax mergers and acquisitions and capital raising for various sectors. She brings a wealth of experience and extensive networks to the role of Inspector general, having worked with a range of government and private stakeholders, as well as the legal profession and many industry bodies. Karen is a solicitor admitted in New South Wales. A chartered tax advisor with the Tax Institute. A chartered accountant and a member of the Australian Institute of Company Directors. Karen, welcome to TaxVibe

Karen Payne

Thank you. 

Robyn Jacobson

Karen, can you explain the role of the Office of the Inspector General of Taxation and Taxation Ombudsman? Because there are two different roles here. What's the purpose of each?

Karen Payne

Well, the Inspector General of Taxation was set up in 2003 and it's fundamental to address the secrecy and confidentiality provisions in the tax rules. So we were set up with powers to, if you like, lift the secrecy veil to go and take a look and provide independent assurance back on back to Parliament and all the community and all the minister on what should be improved. In 2015 we inherited the Taxation Ombudsman role and that is a very different role where we're now investigating on behalf of individual complainants. And by individuals I mean not just people with heartbeats but entities as well, but anyone who's a taxpayer who wants to complain about the way in which their affairs are being administered. So that is a role we've been providing since 2015. And we can also sorry, I should mention, even though more than 90% of our complaints are about the Tax Office, we do investigate complaints by practitioners about the way in which the Tax Practitioner Board has dealt with them as a practitioner.

Robyn Jacobson

Essentially, the role of the Taxation Ombudsman is to deal with an individual taxpayer complaint. When I say individual, it could be any type of taxpayer that initially made a human being taxpayer create a complaint of an individual taxpayer who has a situation. Whereas the role of the Inspector General of taxation is more about understanding the processes. And if there are systemic problems within the way the system is being administered. But might there be occasions where in looking at a taxpayer's matter, you realize that they're not alone, they're not Robinson Crusoe, if you like. There in fact repeated instances of that occurring, and somehow this has morphed into a systemic issue which might indeed lead to an investigation.

Karen Payne

I think that's exactly right. And I think the key thing is that these two roles are very complementary. So we see stuff happening in our review space in death and taxes, for example, and that then leads to people acknowledging or recognizing they can lodge complaints with us about the way the ATO is administering deceased estates. But the the genesis for the Death and Taxes review was the complaints we were in fact receiving on deceased estates. Similarly, we saw through the job keeper, job maker processes a number of complainants coming to us and we had investigated those individual complaints, but collectively we thought actually this is something we should report on publicly So people are aware of and this has been the improvement we've identified in administration for the Tax Office to take on without needing to come and lodge complaints with us. So the two processes, the two investigation models absolutely are complementary and one informs the other.

Robyn Jacobson

Could you briefly explain, Karen, the scope of the powers? So what are you able to do? What can you ask for? What do you have the right to demand of the ATO and what do they have to comply with?

Karen Payne

I'm going to start with the very extreme view. Right. We have powers of compulsion. We can go and conduct a Citibank raid on the Tax Office if we need to. So we have very, you know, compelling powers to access information if we choose to exercise those powers. Now, I would say that it would be ridiculous for us to exercise those types of powers of compulsion on every occasion. So the more frequent way in which we get access to information is through our ordinary investigation rules. Now, once upon a time when we were the Inspector General of Taxation, we had access to information as a right. When we inherited the Commonwealth Ombudsman, Legislative framework. We now have access according to the rules of the Ombudsman Act, and those rules say we have access to information. If the Commissioner chooses to give us access to that information now whilst practically I'm not suggesting the Commissioner is preventing us from accessing information, if I were to stand back and say what what is independent access? What does an independent investigation look like? Well, for me, it doesn't look like the head of the agency that you're investigating gets to choose whether you do or don't get access to the information. So if I you know, if I could have a wish for Christmas, it would be that we got actually unfettered access to information. Because even though I'm not suggesting we don't get the information that we request, sometimes it's a challenge. I think the fact of having an unfettered statutory right to access information changes the way people see that they should engage with you. And you can see some of those recommendations in the robodebt Roll Commission report, where the commissioner has suggested that there should be an obligation to assist the agency through an investigation. The recommendation is not that it's just imposed on the head of the agency, but on all officials that work in that agency. So that's one of the recommendations in the Royal Commission that we keenly watching.

Robyn Jacobson

You've been delivering sessions for the duration of your tenure to date. And one of the questions you ask in your sessions is about the importance of integrity and the awareness of your office, both that of the inspector general and that of the ombudsman. What are you finding in terms of awareness and is there more that your office and more generally the profession can do to understand what it is you do?

Karen Payne

I think absolutely there is a need for greater awareness of our office. We did a review into how effective is the ATO in advising taxpayers of their rights to appeal, complain and dispute challenged decisions. And one of the recommendations out of that review investigation was that actually the Tax Office should proactively tell people how to lodge a complaint with them with the tax Office and with us as the Taxation Ombudsman. You'll see in our charter on page three, the Tax Office have now put that into our charter, but that's only recently come out. It came out in June and they've made clear in our charter that your position, your rights as a taxpayer are not affected, just because you choose to lodge a complaint either with the Tax office or with ourselves. That's very important because fear of reprisal action, I think, is what sometimes holds people back from lodging complaints. Anyway, it is now formally in our charter that you can lodge a complaint with us as the Ombudsman, but ideally in the first instance you try and resolve your complaint with the tax office. It's also the case that the Tax Office should be putting that information on decision correspondence going to taxpayers. They should be reminding everybody that if you disagree with the decision or you wish to challenge the decision, here are your avenues and one of those avenues at the at the very least should be recognizing the tax ombudsman. But I absolutely acknowledge there's more for us to do. I am always surprised at how many people, when I put up my polling questions at conferences will say either they don't know that we existed or if they're aware of our existence, they don't know what we do know. I'm should also add the Senate Economics Legislation Committee did a review three months into my term. They did a review of the performance of the Inspector General of Taxation and one of their recommendations. They make 16 recommendations. All good, in my opinion. But one of their recommendations was that the government should fund a program to promote the fact that there is in fact a taxation ombudsman and service.

Robyn Jacobson

To the community.

Karen Payne

Correct, yeah, I didn’t advocate for that, the committee came up with that idea themselves, which would be.

Robyn Jacobson

But you're perfectly happy

Karen Payne

Happy, but I'd be very happy to read that to receive additional promotion because as I said, I'm speaking to sophisticated tax literate audiences and they don't know that we exist. Well, how is the rest of the community going to be identifying that we exist?

Robyn Jacobson

Karen, do you have any observations on the evolution of your role from its genesis to now and from now into the future?

Karen Payne

Yeah, I think we are evolving as an agency in terms of where our core focus is on. I think it's always still the case and I think it always will be that we need to make sure we're engaging with stakeholders to understand what are their concerns. That's kind of fundamental and core to what we do. So I don't see that changing. And whether that's to inform our review investigations or to just help, you know, promoting the fact that there's a tax ombudsman in the system. But on the Taxation Ombudsman side, I can see that that will evolve materially and significantly. And in particular, because we're now seeing ourselves investigating more complex and highly complex disputes where, you know, we are looking to see if we can get outcomes for people where they've been recognizing they've been through three or four decision processes internally at the Tax Office as well as a complaint process sometimes as well as, you know, objection and or appeal processes. And then they come to us. So you know, we're at the end of the complaint chain. And so by the time they come to us, they're very frustrated, They're sometimes angry, they're very confused. You know, they just looking for answers. They think something's unfair. We're finding that we are more and more engaging in investigations of very complex dispute issues. And that's a big drain on our resources and our time. But the rewards, even though we can't compel the Tax Office to do anything, I think the community does respect the fact of our independence when we've gone through the process, even if we sometimes come back to them and say, look, we've taken a look at what the tax officer have done here, we would have done this differently, but we can't compel them to do anything. And, you know, here is our report. So more and more complex investigations and trying to find better ways to interact with the community so they understand where their investigation process is at. That's where I kind of see the next stage in our evolution.

Robyn Jacobson

And I think it's fair to say that your office is not about that. I use the word in a non-criminal sense prosecuting a government agency or otherwise acting in the interests of the taxpayer. It's about what's good for the system, particularly with your inspector General Hatchell, and trying to improve the efficiency and the way the tax system is administered. Now, there are times the taxpayers, of course, can play a greater role in the responsibilities, particularly we look in the fraud space of making sure that everything is done properly according to their obligations under the law, but equally, the administrator has enormous responsibilities to administer the law properly. So in terms of your role, I always see you as a bit of a guardian or a custodian of the system. You're always trying to improve the way that works.

Karen Payne

That's right. So we're not a taxpayer advocate service like they have in the US. We're there to investigate independently, and that means we're not taking the taxpayer's side or the tax office's side. We're there to report or mediate, if you like, exactly what we find and what we think is the fair outcome as an independent observer. So I don't think that's always understood. And sometimes the complaints that we get back after we finish an investigation is, you know, oh, well, you weren't able to change the tax officer's view. You couldn't get me a different outcome. What got your decision Override the Tax Office decision? It's an ombudsman model. We we don't.

Robyn Jacobson

You don't? The Federal Court That's right.

Karen Payne

We don't pretend to be substituting for the Tax Office's decision. It's their decision. It's their administration. We like an independent commentator on whether or not that administration is fair and consistent with law and the Tax Office's own guidance.

Robyn Jacobson

Hey, Karen, I'd like to look now at some of your previous investigations. There are many of them, and anyone who wants to look at those can jump onto the website, which is i g t decaf dot aew. So some of the key investigations have undertaken. You've looked at the way the ATO administers and manages objections and there's an interim report available for that. You've looked at how the ATO deals with deceased estates. You've examined the future of the tax profession. You've looked at how the ATO handles and manages the use of garnishee notices. And even in 2014 there was a report that circled back to some of the previous investigations to say, Well, how have these reports gone and the recommendations that we put forward? Is that still the case? And if not, what is the process now for looking at whether prior recommendations are implemented?

Karen Payne

So we did actually change the way we're going to go back and if you like, do a post implementation review, recognizing we have limited resources, we thought another approach that might have suitable integrity was to rely upon the ATO's own audit and risk committee process. So since 2014, we don't do post implementation reviews to see how things have been progressed and implemented. But instead what we do is we write and confirm at various regular intervals with the Audit risk committee that they're seeing sufficient evidence of the implementation by the Tax Office of those recommendations. It's also fair to say that because we do still engage actively with stakeholders, if things that have been promised to be implemented and are not actually either progressing fast enough or they're not being implemented in the way that it was once anticipated they would be, we get stake all the feedback on that and we, you know, we go and make independent inquiries or individual inquiries to say, hey, what's happening there? So deceased estates is a classic. There are still a lot of complaints that we get around the ATO's administration of deceased estates, and I still get lots of stakeholders coming to me saying, Hey, this was supposed to happen and it hasn't and where is it? And we're, you know, we do chase those things.

Robyn Jacobson

Have there been any positive changes as a result of your report, an investigation into the handling of deceased estates?

Karen Payne

Look, there's been a recognition that the representative that the Tax Office can engage with is not always going to have probate. And there has also been a recognition within the tax office that the threshold before, which, you know, they can deal with somebody, has been increased to allow more people to engage with the Tax office, even though they don't meet those formal legal, personal, representative requirements.

Robyn Jacobson

Because the law is very strict around, of course, who is authorized to act on behalf of the taxpayer or when your taxpayer has passed away, then they, of course, can't authorize anybody. And we often see the example of the executor and administrators a slightly different situation, because it tends to be, of course, that more court appointed. But an executor wants to go to the accountant who looked after the deceased person's affairs and said, Well, why can't you just do this? Why can't you just lodge the outstanding return and why can't you make this happen? And there's all this administrative red tape around what they're able to do and what they're authorized to do. So they've got to be some practical cut through as well.

Karen Payne

Exactly. And there was actually a report that was released earlier this year. It's not in the tax base, but it's on the operation of my golf where they acknowledge that, you know, not everyone who should or needs a myGov account is going to be computer literate. So the suggestion I think it was some folks report the suggestion was that you should have some kind of a nominee arrangement that is acceptable in relation to my job rather than people basically defrauding their relatives, pretending to be them. You should just set up a nominee account or a nominee arrangement and that should be permissible. I'm not sure where that's all got to, but I guess it's the kind of same theme where you have a number of well, in the case of deceased person, they're dead, right? They can't they can't engage with the tax office. But somebody who is acting on their behalf and or who has responsibilities to wind up their estate, even if they don't need probate, why can't they be recognized for the purposes of engaging the tax office.

Robyn Jacobson

And just to play devil's advocate, in this current climate, an environment of identity theft and cybersecurity issues and even elder abuse, I can see why there would need to be a great control series of controls over who would be authorized to do that, because you certainly don't want to pave the way for people who are not authorized, who claim to be authorized getting access to that type of information.

Karen Payne

I totally agree. But you also want it to be user-friendly, so you try to keep in balance these two competing objectives sometimes. But provided you've got the right checks and balances in the system, it does still seem appropriate that you can have lines of communication that are user-friendly and that are accessible.

Robyn Jacobson

So turning now to your current investigations, there are certainly three that are currently sitting on your website, and this has to do with the exercise of the commissioner's remedial power. Secondly, the exercise of the commissioner's general powers of administration. And thirdly, the ATO's administration and management of objections that you've been working on these for many months. In fact, I've got to suggest over 12 months in some cases. Where are these actions and when can we expect for those to be publicly released? And what do you hope will come out of these three reviews?

Karen Payne

So the report that looks into the commissioner's administration of his general powers of administration is currently with the minister. That report makes recommendations for both the Tax Office and makes recommendations for legislative change because it includes recommendations for legislative change. It has to be I don't get to release that publicly. It has to be released by the minister, but I've provided the report to the Minister for his consideration and he may or may not choose to respond to the recommendation at the time he releases it, but there is a statutory obligation to release it within a particular time frame. I think it's 25 House of Representatives sitting day. So that should be out before the end of October. Similarly, the remedial power report is largely written and if not currently with the Tax Office soon to be with the tax Office. So again, I would say that that should be released to the public sometime before the end of October. And importantly for me, because I see both of these reports as dealing with to some extent a similar problem. I wanted to do these two reviews together, but I was persuaded that we should separate them. So anyway, they'll both be in the market largely around similar times. The objective report. We're still working through a raft of information that the Tax Office has given back to us. The phase one process was to put out the will. This is the data, and then phase two is then to go and interrogate for some of the concerns that people were raising, whether it's around the data. So that's probably not going to come out. I haven't seen a draft of that report. I don't believe that will be out this year, but in the meantime, we've released other reports and we're doing other self-initiated or unemotional reviews. So we recently released a report on the ATO's administration of the Small Business Litigation Funding program, which the funding from the Tax Office came to an end on the 30th of June this year. But I believe the Tax Office's intention is that it will just roll into test case funding. We've made a number of recommendations in that report, even though it wasn't a review. We did it on the back of having done two very detailed dispute investigations where we engaged a cost assessor who's, you know, clearly experienced in the ways of the Federal Court to come to look at what the process was for those funding arrangements. And based on their report back to us, we've then made, if you like, recommendations on on what we would like to see as improvements to the funding arrangement, because fundamentally people were not clear upfront on what costs would or would not be compensated. And if you're about to go into litigation, I think you need to be very clear on is how much of these costs are you funding yourself and how much is being funded. Because the Tax Office has chosen to brief somebody externally. And then we've got a number of other own motion investigations that we're either currently scoping or will we'll get off the ground soon. One concerns the way in which the ATO administer a debt release on grounds of serious hardship, and that was a follow on from an earlier review that we did in relation to collectible but undisputed debts. And then we've got another review, a self, an own motion review where we're looking at the concept of an approved four. Now you might say, well, that's a pretty specific thing to be looking at, but it has big implications on whether or not the commissioner has a discretion to give you more time to lodge an approved form. So we're kind of we think it's important to take a deep dive on that.

Robyn Jacobson

There's always a lot that you're managing, but with all of that going on, what's ahead in the next 6 to 12 months? Say what's on your radar and how do you see your role evolving even further to bring fairness to the system?

Karen Payne

So there's a lot on my radar. There's a lot of things I'd like to be doing. I have to manage resources and do, you know, do the things that we can do. And for that reason, I have to prioritize. So the one thing I would say is we keep a register of potential review investigations on our website. I wouldn't mind if people took a look at that and maybe feedback through the Tax Institute. You know what are your top three issues? If you have a look at that list, or maybe there's something that is on your top three that's not on the list that you want to feedback to us. And that way that helps us to prioritize what we should be looking at in terms of the dispute investigations. The key thing we're looking to do in the next 6 to 12 months is to implement a new case management system. That system, I think, will be game changing for us because it's going to have a protected portal that allows a complainant to see where our investigation on their complaint is at. And that way they'll feel like there's more control from their end in terms of understanding, you know, is it the ATO that's delaying the in the conclusion of their investigation? Is it the fact that we requested information from the Tax Office and we haven't got it, or is it in fact the complainants delay because we've asked them to give us something to, to progress their investigation and we're waiting on that so we can progress it. I think that aspect of our complaint Investigation service will help us a lot in terms of helping the community understand where their investigation is at. And take a if I'm frank, take a lot of the frustration run out of the process because sometimes it does feel like a bit of a black box. And I totally get that.

Robyn Jacobson

Considered also improving the relationship or communication because essentially what you're describing here with that system upgrade is improve transparency and visibility. So instead of something being submitted through a website or ad, that's generally how complainants will do so. But they might also make a phone call that might save some of those unnecessary calls, which the more occasions your staff are dealing with phone calls to say, where is this at, the less time they have to spend on actually investigating the particular issue. But certainly having that transparency will be a really good thing to taxpayers.

Karen Payne

Yeah, So I agree. I think it's all about improving the transparency of our investigation, but improving the accountability within our investigation by for those that could objectives.

Robyn Jacobson

And I assume there'll be some communications about that next year when all that rolls out and improved experience for the complainants. 

Karen Payne

We hope so. Absolutely. 

Robyn Jacobson

Karen, thank you so much for your time. It's been great chatting with you. 

Karen Payne

Cheers. 

Robyn Jacobson

Thanks for listening to this episode of TaxVibe. I've been chatting with Karen Payne, Inspector General of Taxation and Taxation Ombudsman, to keep up to date with Tax five. Be sure to subscribe, rate and review wherever you listen to your podcasts. If you'd like to connect with us, you can find us on socials. Not a member of the Tax Institute. Join a collective voice of 10,000 practitioners at the heart of the profession and find out what the best tax professionals have in common. Visit taxinstitute.ocm.au.  We look forward to joining us next time. 

The Superannuation landscape: an ATO perspective 

Release date: 6 October 2023

In this episode of TaxVibe, Robyn chats with Emma Rosenzweig, Deputy Commissioner, Superannuation & Employer Obligations, ATO, about the current Superannuation and FBT environment.

They cover the top issues currently facing employers, what happens if employers get it wrong, how the ATO is supporting employers and employees and why a ute is not a magical purchase that is automatically exempt from FBT.

Host: Robyn Jacobson, CTA

Guest: Emma Rosenzweig, Deputy Commissioner Superannuation and Employer Obligations, ATO

Robyn Jacobson

Hello and welcome to TaxVibe, a podcast by the Tax Institute. I'm Robyn Jacobson, the senior advocate of The Tax Institute and your host of today's podcast. I'll be chatting with some of the tax profession's great thought leaders who will take valuable and practical insights you may not hear every day. We hope you enjoyed this episode of TaxVibe.  

I'm joined by Emma Rosenzweig, Deputy Commissioner Superannuation and employer obligations at the Australian Taxation Office. Emma is responsible for ensuring a complex ecosystem of employers, workers and retirees and ensuring that superannuation funds operate efficiently. Support willing participant nation and safeguards entitlements has worked for the ATO for 24 years in a range of roles across nearly all areas of the organisation. Emma holds a Bachelor of Laws, a Bachelor of Commerce and a masters of tax. Emma, you last spoke with us just over a year ago now. So welcome back to TaxVibe. 

Emma Rosenzweig

Thank you, Robyn. Thanks for having me. 

Robyn Jacobson 

Look, it's really good to check in with you on a regular basis to see what's happening in your ecosystem. And it's a big one when you're looking at the employer obligations as well as the entire superannuation system, both large funds and small. So there's always a lot we can talk about. But as usual, that's a good place to start with the superannuation guarantee regime. Now a few things are going on here, but let's just set the scene. We've had 31 years now of the regime and yet it continues to be a challenge both in the area of law, the way that it is interpreted, the way that it's applied and of course dealing with it in practice by both employers and employees. But there is still a really significant gap and that is basically the difference between what you should be receiving by way of employer contributions through the superannuation system and what is being paid. So what's the extent of the gap and what's the ATO doing about it? 

Emma Rosenzweig

That's right, Robyn. So people would be familiar. We measured tax gaps across a range of the texts that we administer and so the super guarantee gap does the same thing as you describes. Our last measurement of the gap puts it at 4.9% or $3.4 billion, and that is the net gap. So after our intervention, that compliance intervention, so, you know, that is still a very big number. A small percentage in a very big system still relates to a very big number of gap. It does mean that a large number of employers are doing the right thing, though, and I think it's important not to lose sight of that. It's easy to talk about the problems, but that that really does say that 95% of the contributions that should be going into the system are going in, which is actually really, really good. So we should recognize that most employers are doing the right thing there. But it is important that we tackle those employers that are not doing the right thing. And I guess for the ATO Super Guarantee is one of those things where we do probably have a tolerance for people who are not compliant because that is entitled minutes that we collect on behalf of employees. So some of the things we take it very seriously. We obviously action any of the complaints that we get from employees about unpaid super. I've got the figures for the 21/22 year. We got 19 and a half thousand complaints from employees in that year and actioned all of those complaints. We also initiate our own cases based off data that we have, and we also get voluntary disclosures from employers who do undertake things like payroll audit or they have an employee come to them directly and they realize that they've made a mistake. And so we do have employers come to us voluntarily to lodge super guarantee charge statements. So we do try to be very active in this space. But I really predominant approach is to try to help employers get it right this time. So we also try to do a lot of communications and messaging. We've got some videos out at the moment having conversations like these. We do a lot of speaking engagements, conferences or direct to employers where we try to help them make sure they understand their obligations and get it right, because that's really the best way for this to work that they get it right the first time and super goes into funds for those workers 

Robyn Jacobson 

Like so many other parts of the tax system. The ATO relies heavily on data in regular data, not just through single touch payroll, which has been in place for a few years now, depending on whether employees transitioned in early or later on. But of course, you've now got the data coming in from super funds, so there's quite a bit of matching going on. To what extent is this vital to the work that the ATO does? 

Emma Rosenzweig

So data is a growing increasingly important part of the work that we do, and we are making some big investments in the way we can bring that data together. We were provided with some additional funding by government in budget to do that as well and to enhance our ability to be much more proactive where employers have made a mistake. So we've been talking for a while to both employers and super funds about the importance of quality of data and the importance of so the data that they were reporting to us is right because we are increasingly bringing those to big datasets to talk to that together to try to identify where an employer has not met their obligations. And one of the things that we are looking to do is for April next year or the end of the first quarter next year, we'll actually be starting to nudge employers who have not met their obligations to that quota. Or five forces will be starting to prompt them and actually write at them, indicate that we're aware. We've identified that there might be a problem. We will obviously make sure those employees get a chance to correct Doctor, if that's incorrect. You know, sometimes that happens, but we will be much more proactive. So at the moment, you know, compliance activities are predominantly driven by employee compliance. And we still take that very seriously. But we really want to get to a position where we are proactively identifying those underpayments much earlier, and we're not reliant on an employee. We don't put employees in a position where they feel that they have to come and complain to us. So data, as you can tell from that, will be increasingly important. And I know you want to ask me about payday Safer in a bit, but if you think about as we work towards payday Safer on 1st July 2026, it's really important that employers start to have those expectations that we will be more proactive and that we will be identifying problems earlier and that we will be acting on it and expecting them to act on it, which we also hope will help employers get back on track. So I think super can be one of those problems where if people get behind, they can bury their head in the sand a little bit and then the problem grows and grows and sometimes gets to a point where they actually can't deal with it. It gets to be a very big liability that they have to be paying off. So we also hope that by acting earlier, we will actually be able to put employees in a position where they can respond faster, hopefully get back on track quicker. 

Robyn Jacobson 

You’re right Emma, I will be asking you about payday super very shortly, but before we get onto that, it's probably worth reminding our listeners that the rates are continuing to increase at the moment and when I say at the moment, there was some rate increases put through some years ago that go right through until 1st July 2025. So at the moment we're on 11% for this year. Is the SG rate or the charge percentage and it will move to 11 and a half and then finally to 12% of years' time. With all the pressures on businesses at the moment, in fact, more broadly across the entire community with cost of living and rate rises and so on, are you findin that I guess there are two issues in here. One is about the change in the rate and making sure employers are on top of that information so they know when they go into a new income year, they are actually applying the correct rate. And there's the secondary issue that as that rate increases, depending on whether the employee is on a package, which means as the rate goes up, take home pay comes down, or whether it's more a wage plus super, in which case the employer pays that and that becomes very much a financial impost that's increasing on the employer.

Emma Rosenzweig

That's right, Robyn. I think you've described the scenario. We do a lot to try to remind employers about those rate increases at the right time. We don't see that as a big problem, that employers are getting that wrong. So that's great. Obviously, the message is getting out there. I think also many payroll systems actually have it built in and have those automatic updates built in, which also makes it really easy. That is probably one thing that with checking, sometimes employers have overridden those automatic updates or they might have an agreement in place that they've put a different amount in. So it is always worth checking at the beginning of the year that your system has actually updated and has gone to the new amounts. So we don't see it as a really big problem that employers aren't on top of those increased rates. But yes, all those challenges you just noted that that working out the total remuneration package amounts or whether this is in amount on top is something that employers just need to keep on top of. 

Robyn Jacobson 

Let's turn now to the rising debt. So you've referred a couple of times to employers who sometimes don't pay it and then it becomes a growing problem and sometimes it all becomes too much and they just turn away from the problem but that doesn't make it go away. And I do remember the ATO saying at a conference years ago that, you know, don't ignore us because we don't go away. We're still here. And that debt doesn't disappear and it's not going to magically evaporate just because you don't want to deal with it as an employer. So when you talk us through these, the level of debt now a concern, what is the ATO doing about this? How closely do you work with the Chaudhri and his team at Lodge and Pay? And just on that point, we have separately recorded a podcast with Vivek and we will be releasing that in the next little while. And what sort of action are you taking in respecting employers who don't do the right thing? So it's quite a bit to unpack there.

Emma Rosenzweig

Look there sure is, And look, I was going to say, many of you or many of your listeners might have been at the tech summit and heard Vivek speak personally about the reset approach to our collection activities, which is really critical and super guarantee is a priority for them. As part of that. So if I just paint a bit of a picture, the debts to super guarantee, which is the amounts that we have identified, people go and actually crystallized as a liability, has grown from just under $1,000,000,000 before the pandemic to around $2 billion today. So really increased significantly in a fairly short space of time. The other challenging part of that picture, to paint is that about 87% of that unpaid super guarantee debt is owed by small businesses. And as I said earlier, super is an amount that really is an entitlement to your employees. And these are the people who are working in your business, helping your business grow or thrive or survive perhaps. And so amounts that you're not paying are really directly impacting their futures. So we do take that pretty seriously. And as you can see from that growth, it is something that we are concerned about. I'm sure that we'll talk to you in the other podcast with him about some of the actions he's taking. But certainly we give people plenty of opportunity to engage with us. The best outcome is that they can be in a position to pay those amounts and get on top of their top of their liabilities. But if people can't and if people or people won't engage with those debts, there are steps that we can take. So we have direct penalty notices that we can issue. We can issue directions to pay any fee. And if you Don't comply with the direction to pay. It is a criminal offense. We also wind up businesses and can prosecute people. And another power that we have that we haven't used very much yet. We were given this just before the pandemic. And so it is something that we're thinking about, how we use that we actually now have the power which is an exception to our secrecy provisions, that if you have not met your super obligations, we can actually inform all of the employees that you have of that, not just employees who have complained to us about unpaid super. So obviously that is almost putting people on notice about your behaviour as an employer, because often employees don't pay attention to this, so they might not realize. So that is another power that we have to make sure that the people who are affected by this understand that. So, you know, I think, as I said, those are all almost last resort things we'd like to do. We'd really much prefer to be in a position where we can work with the business and get them back on track, paying their obligations. 

Robyn Jacobson 

I’d like to ask you about the winding up, and I know over many years we've been conversations around, well, if the ATO proceeds with winding up, then doesn't that eliminate the ability to recover anything? Whereas if the business continues to operate, at least there's a chance of recovering something. How do you respond to that? And also, where does the issue sit as a priority in terms of that is do you see liability in a winding up of the company? 

Emma Rosenzweig

So I might start saying I'm not insolvency expert, so Super guarantee does have priority in a winding up. And as I've said a couple of times now, that is because it is an entitlement that goes to the workers. So that's important to realize. And look, getting that balance right between is a business in a position to be able to trade out of the difficulties or not. It is a real judgment call that our staff have to make And it is a hard one tonight. I would say if you're a business who is having that conversation with us, the more engaged you can be in that and helping us understand why, on what basis you think you can actually try it out of that, the better informed stuff to then make a judgment about whether I agree with you not. I think people also need to think about not only do you have to be in a position to recover the liabilities that you currently have, but you have to do that on top of then meeting your ongoing obligations as they do. So there's no point cutting up past liabilities if you're actually just digging a bigger hole next door with new ones. So all of those things are relevant. I think in the case of business with employees who are not meeting the super obligations we have, and I certainly have a lower tolerance for businesses who may be just digging a bigger and bigger hole and getting themselves into more and more trouble. And so that judgment call about the reality of cannabis and actually try tried out of this problem is probably one we have a lower tolerance for when there is belt simply because you know I've said I'm like a broken record today but it is the employee's money. And in a sense we have to really think about how long we let that business go on becoming more and more indebted to their workers before we take any action. So, look, I think getting that balance right, it's not a science, it's a bit of an art, but the more informed out stuff be, the better position you can put them in to understand your thoughts on it.On why you think you can trade out the better decision making might

Robyn Jacobson

We think about superannuation. I am not suggesting that it is any more or less or greater importance than paying salaries and wages. But if I don't pay you a dollar today as an employer, you're missing out on that dollar. Let's assume that some after tax that when we're talking superannuation, a dollar today that's not sitting in the superannuation fund and isn't invested for what could be 40 years, we're talking an enormous compounding benefit that's not available to the employee either.

Emma Rosenzweig

That's exactly right, Robin. So and I think one of the challenges with Super is that often employees, particularly young employees, might be in this job. It's not something that they're necessarily thinking about and it's not as easily identified to them if it's not being paid. So if you're not getting salary wages and you can't go out on Saturday night, you might have been paid. That's really obvious. If you haven't been paid to super, it's not something that particularly young people are really checking. So I think some businesses think it's easy to get away with it because it's one of the last things that people might identify that they haven't paid and I guess this goes back to the point we were talking about, about our use of data. We really want to be in a position where we put all the data that we've got in the system to work really hard so that we can identify when that happens. And those young people go out on Saturday night and know that we we are looking after it for them. 

Robyn Jacobson

There's also the power imbalance that when you've got a young employee, they might find it incredibly challenging. And I get why to take on their employer and challenge them on the fact that maybe super's not being paid for fear of losing their job or for it to have an effect on the way that responsibilities are allocated to them in the workplace or their relationships with their colleagues or their employer. So it becomes really difficult from a workplace perspective too.

Emma Rosenzweig

That is true. That is that is very true. It is interesting. We are saying, you know, we're in a tight labour market at the moment and we're actually seeing an increase in employee notifications coming to us. So that's where employees come and complain about unpaid super. And we are seeing more and more employees complain while they're still employed then previously used to be much more common for people to wait till they had left a workplace to complain. You know, I've not done any scientific analysis to prove that that is related to the tight labour market, but it is a really interesting thing to observe that some people seem to they might also be students, that there's a lot more conversation about super at the moment. And so that encourages people to pay a bit more attention. But we are seeing a lot more people come forward and complain at the moment.

Robyn Jacobson 

And if nothing else, it shows there's an awareness of that mechanism to be able to notify the ATO. So that's good. 

Emma Rosenzweig

Yes, that's right. 

Robyn Jacobson

Okay, Payday Super. Let's chat about this. So it's an announcement that was made in this year's federal budget. It is due to commence 1st July 2026, which sounds like a long time away. But having already been involved on behalf of the Tax Institute at some of the target of consultation, that's taken place, I've got an insight as to just how much work is involved, and we're going to need every minute between now and then to be able to design the framework, get the policy implemented.  And of course that needs to pass through Parliament. And then of course the ATO needs to turn its mind to the rolling out of this in the awareness campaign and so on. So broadly, can you tell us what Payday Super is all about, What's going to change and for both employers and employees and so many other stakeholders in this, for those two cohorts, what does it mean for them?

Emma Rosenzweig

That's right, Robyn. It's it's quite an exciting reform that the Government has announced. So I'll probably need to qualify this by saying it is in announcements and it's not law yet and there is still work to do to come back to budget in next year to consider the actual detail of the policy. But the announcement was that employers will be expected to pay their super at the same time they pay salaries and wages. And I guess we've been on this journey for a while with the introduction of single touch payroll. We started reporting at event. So rather than once a year getting that reporting from employers that we actually get event based reporting through single touch payroll, this takes the next step to say actually we need event based payments as well of superannuation. So that's that's the basics. So employers just pay more frequently or some employers pay more frequently than they are now because we know there's already a large number of employers paying more often than the quarterly minimum obligation at the moment. As you said, though, there's lots of parts of the system now that need to actually operate to make this work. So employers are reliant on the software providers to report to us, but also to automate these payments. So we know that digital service providers are going to need to update their systems to do this. There are clearinghouses that offer services to employers. They're going to have to be able to accept these super funds who report regularly to us on contributions. And so they're going to have to make changes to allow for this. And one of the other potentially slightly overlooked, except perhaps by super nerds, elements of the government's announcement was the fact that they will be made to be changes to the super guarantee charge regime as part of this in order to really could temporize those rules about what happens if an employer doesn't meet their obligations. So that is a huge job, but also a really great opportunity to be able to tackle some of the issues that we know employers struggle with at the moment. We know some of the rules are very inflexible and it's partly because they were designed a very long time ago. So very different operating environment than we're in now with prior to choice, prior to a quarterly regime, even never mind a pay day regime. And so it's a really good opportunity to think about what what is the right mechanism to have where employers do not meet their obligations and how do we have the right consequences in place to tackle those problems. So really exciting opportunity and I'm really looking forward to it. I know that we've got a very diverse group of stakeholders in the community as well who will really work with us to help get this right.

Robyn Jacobson

I see it as a golden opportunity to modernize these rules and they were, of course, the back in the early nineties. So history we've had since 1992. Back in those days, we didn't have quarterly payments. That only started in 2003. We had payments made by check. We certainly didn't have a hefty we didn't have the clearing houses, we didn't have stapled super, we didn't have choice of super as you say. And we've ended up all these years later, over 30 years with a system that you describe it as inflexible. I'm going to go a step further and call it draconian because when you've got employers who are treated exactly the same way, regardless of whether they never pay the super for their staff or they pay at one day late, that happened not to tell the ratio through a formal history statement and paying the charge. And that's where it's unfair because it shouldn't be the same penalty regardless of the level of culpability. Also, the fact that the nominal interest continues ticking on whether or not you've paid the amount when that was actually designed to reimburse the fund for the lost earnings, for the contribution having not been made up when it was supposed to. So if you paid the contribution a month late, but you still do till the 80, So that interest keeps ticking and in my view it becomes effectively a double penalty because we've already got the part seven penalty for not notifying the ATO when at a policy level you've also got this interest that keeps on ticking. So that's nothing the ATO is able to exercise discretion on. There is no flexibility for the commissioner as we well know. So that's why I call it a golden opportunity because I think this is a chance to bring these rules into a modern environment, into the 21st century, where we can acknowledge the digital tools we've now gotten, the technologies we're not paying by check, but as you say, to have a quarterly charge when you're going to be potentially paying on a weekly or a fortnightly payroll basis just doesn't work.  And that's why it does need to be altered and refined and made much more flexible to cope with a flexible payroll cycle. 

Emma Rosenzweig

That's right. And look, we've done what we can in terms of we do have party remit the pot seven penalty. And so I think we've worked with a bunch of people a little while ago to put out a press statement about how we would apply those. And that seems to be working very effectively. And the goal of that is to really think about applying or remitting those penalties in line with the behavior of the employer, whether they're someone who regularly doesn't pay, whether that's someone who one off has made a mistake, we hope. And I think the way our penalties are applying now does genuinely reflect that behavior much better. But I think this is an opportunity really to take all of that feedback about the current consequence rules, the current charge regime, and think about what's the right model to have in an environment of pay discipline, a digital environment and really contemporary it. So I agree, Robyn. I think it's a golden opportunity. I don't want to preempt what that outcome might be, but I think reflecting that the goal of this is to get money into the fund for employees in a timely way. It is really important and I think it is a real opportunity to ensure that employees are getting the right amount of money to ensure that business is can manage their cash flow appropriately, reflecting the fact that those amounts are really entitlements. So they work as is really a great opportunity. 

Robyn Jacobson

We shouldn't overlook either the cash flow impact. So it's one thing to change systems and upgrade software systems and technologies and processes, but this will have a real impact for those who are currently paying super on a quarterly basis. The idea is if you're paying smaller amounts more frequently, then you more able to keep on top of those obligations rather than it building up and even potentially falling behind. 

Emma Rosenzweig

That's exactly right. You know, the thing is, I gave you before so that 87% of the current debt is held by small businesses and in some cases they are businesses. Very few cases. Their business is willfully not paying. In most of the cases that we see, they are businesses who have struggled to manage their cash flow in a way that lets them meet those obligations. And so I think that's right. There will be a real impact that hopefully we can get on top of the issues earlier and in the small moments.

Robyn Jacobson

Moving to another issue that never goes away and that sort of employee base as contractor from the perspective of looking at how the tax rules deal with this, there's currently a draft ruling 2022 D3, and there is also advice under development with the ATO at the moment and that can be found on the ATO website. This continues to remain a challenge. So do you have any remarks about where we're at with this particular debate? And of course we've had the recent High Court cases and I'm sure there'll be more cases in the pipeline.

Emma Rosenzweig

 It has been surprisingly active lately. This issue, you know, it goes for a bit of a lull and then we have had a number of cases. So as you said, we have put out a new draft ruling at 2022 slash 33, which was drafted after those two big high Court cases in gem sick and personnel contracting. It also has we have also put out a practical compliance guideline with it which talks about where we're putting our flags on the dates in terms of employers making decisions about how they treat their workers and where they can expect us to apply our resources to looking at those issues. And I'm really grateful for all people who provided a step back and comments on that. So far they seem to be taking an approach that seems to be practical and realistic for people to be able to comply in a way that might give them a bit more certainty. They asked to draft. We have had a bit of feedback on them, but we also had a recent Federal Court case of James versus the commissioner and we want to make sure that we reflect the considerations in that case in those two cases. So if there are more cases in the pipeline that then it will become at what point do we finalise these and have to update the cases? We're not aware of any other cases at this point, although we have sought as special leave to appeal in the JMC case on one particular element of it. So we are just waiting to hear about whether we'll be granted that special night before we finalize those. There has been a bit of a that has taken a bit longer to finalize them than we initially thought, but we do want to make sure that they genuinely reflect the current state of affairs in this issue. But but it is an interesting and complex issue. We know for a lot of businesses to work through. So we really do highlight that our approach in that case gives some clear guidance about the steps a business can take if they want to have confidence about how they will look at the decisions they've made.

Robyn Jacobson

Neither of us are particularly Fair Work experts that I just also want to mention to our listeners that there is a bill before Parliament that is dealing with proposed changes to the Fair Work Act, and for that reference, it's the Fair Work Legislation Amendments, Closing Loopholes Bill of 2023 and might be good to look to bill once it goes through Parliament, may be early next year and have a chat about what that means from an employer and a superannuation perspective.

Emma Rosenzweig

Yes. So that that Bill does not make any changes to superannuation or tax legislation. And so we're obviously interested observers in how that progresses. It's been referred to a committee who are due to report early next year, but at the moment that Bill does not make any amendments to any of the tax laws. So we don't say it directly affecting the way we administer any of that current legislation.

Robyn Jacobson

Thank you. So to another of your huge portfolio, Fringe benefits tax. Now, we're not in FBT season at the moment, as we all know, but you are still finding that there's a bit of a knowledge gap, and particularly with this tight labour market that you have referred to already, you're saying particular types of behaviours that concern the ATO because there could be some employers not aware that they're offering taxable fringe benefits and therefore could be overlooking their obligations here.

Emma Rosenzweig

That's right. So I would say maybe it's not FBT return season, but perhaps all year is FBT big. And if you are offering some of these benefits. So, you know, I have to put a plug into good recordkeeping here and make sure that even though it might not be tax return time, it is important to think about the records you might want to keep. But that's right. We are seeing more and more employers think about how they can retain staff or check staff. And part of that might be to offer them non-salary benefits. And that might mean some employees who've never been part of the system before are now suddenly brought into it or aren't aware that actually they should be paying if they pay on these benefits. So really want to encourage people know your business listening to this and you are providing non-cash benefits, whether you're giving people tickets to the footy or to the theatre, or you're providing a car or all sorts of things, if, if it's a benefit you'll give in to your employees. Have a think about whether they could apply. And if you're a practitioner, perhaps it's great to ask some of those questions to, to some of your businesses as well about whether they've taken on any paper or offered any new package arrangements to people because it is a real challenge to make sure people are aware that they've got these obligations.

Robyn Jacobson

You provide some specific examples of the sorts of benefits you're seeing out there that perhaps are more common or perhaps being offered by an employer for the first time? 

Emma Rosenzweig

Well, look, I think one of the things that we might have seen a little bit of media on recently, because we've been trying to bust some myths about the fact that providing a car, particularly a use this seems to be a myth that if you buy a you can provide it to your employees that it's not subject to if they take a there's no magic in it being a ute. And so I think it's really important to people to know that it will be subject to FBT unless there's really minor and incidental private use of that vehicle. So that's one of the things we say, you know, people providing a car, that car can be taken home in the weekend and you drive kids to soccer games and you might go camping with it. Particularly Ute’s really good set camping that is not incidental personal use and does make that subject to fringe benefits tax. So I think thinking about the use of work cars is really important. There are record keeping requirements people need to meet to to show the use of the car. And we do look at those. If we if we come and look at you and ask you questions about your as they say, the cars would probably be one of the biggest benefits, Robyn, that we say people, people get wrong, 

Robyn Jacobson

but it could also include tickets to events and I'm thinking of, for example, the Melbourne, the Australian Open is coming up again and we've got Melbourne Cup season coming up and football finals and all that sort of thing. So a lot going on down in Victoria. There could be school fees being reimbursed by the employer that you may have to sacrifice arrangements, not into super, but I'm talking other types of benefits. So there could be a range of things that people do need to turn their minds to.

Emma Rosenzweig

There are a whole range of benefits that people offer. And and I think that's right. There's all sorts of entertainment benefits that we say people are afraid to say meal expenses, reimbursement of living expenses. So all of those things can be subject to, as they say. And so I think if you're providing any of those to your employees, it's worth going and asking the question.

Robyn Jacobson

Might be worth highlighting another one that people can overlook, we've got the changes over the last year relating to the provision of electric vehicles. And if I might, certain conditions they can be exempt from FBT, but it doesn't stop them being reportable as a reportable fringe benefit. So that's something else that employers need to be mindful of and employees because it can affect, of course, their overall reported income.

Emma Rosenzweig

That's right. So it's still important to recordkeeping purposes to make sure that even if they do meet all those requirements to be exempt, so an employee salary packaging an electric vehicle, it may well be exempt from FBT. But you're right, Robyn, that it will still be considered a reportable fringe benefit. And that is important to report through to us. And as you say, it can affect people's entitlements to other benefits, welfare benefits. It can affect if you have a fixed it, it it gets included for calculation of your HEX debt. And the other thing with electric vehicles, I think is important to note, so things like the running costs of the vehicle registration insurance and I understand they don't need anywhere near as much maintenance, but repairs and maintenance costs can also be, if they take free things like the provision of a home charging station is not actually included in that exemption. It is it is not part of the vehicle running cost. And so that's another thing to think about too. If you're actually providing reimbursing for the home charging station, that is likely to be subject to if it's a property fringe benefit or an expense payment fringe benefit.

Robyn Jacobson

Helpful. For the last one, on a technical level, consolidation for income tax purposes does not facilitate consolidation for FBT purposes. They're quite separate pieces of law. 

Emma Rosenzweig

Yeah, look, it is something we do see that some that businesses are trying to lodge a consolidated return and so that makes it really hard for us to data match. It is very likely that if you're trying to lodge a single FHA return for a group of companies, that it will generate some questions from us. And generally people prefer to avoid having us come and knock on the door and ask them questions. So I really encourage that if there is a corporate grade in place, the H employer in the group needs to lodge their own FHA return. 

Robyn Jacobson

So in closing, any tips or where people can go for more assistance or help? 

Emma Rosenzweig

Well, we have plenty of information on our website ato.gov.au. We try to give it in lots of different formats. We have some great videos on Super Guarantee and a lot of information about FHA as well. If people are interested in what we do do in terms of super guarantee compliance, if they search for ato.gov.au/sgsnapshot, you will get straight to some information about the compliance activities we do and we'll be updating that in about October when our annual report goes out. That would be the latest SG gap as well. But obviously then organisations like yours as well, Robyn, and tax agents, BAS agents, payroll advisors are excellent resources for people to ask for assistance in. 

Robyn Jacobson

As always, there's always so much to unpack, so much more we can say that I thank you for your insights and for sharing your various experiences and anecdotes with us.

Emma Rosenzweig

Thank you so much for having me. 

Robyn Jacobson

Thanks for listening to this episode of TaxVibe. I've been chatting with Emma Rosenfield, Deputy  Commissioner Superannuation and employer obligations at the Australian Taxation Office. To keep up to date with TaxVibe. Be sure to subscribe, rate and review wherever you listen to your podcast. If you'd like to connect with us, you can find us on socials.

Not a member of The Tax Institute? Join a collective voice of 10,000 practitioners at the heart of the profession and find out what the best tax professionals have in common. Visit, TaxInstitute.com.au, we look forward to you joining us next time.

Uncertainty vs. certainty in death and taxes

Release date: 22 September 2023

In this episode of TaxVibe, Robyn chats with Ian Raspin, estate taxation specialist and Managing Director, BNR Partners, about his broad experience in advising on the myriad of tax issues associated with deceased estates.

They cover:

  • Valid wills, intestacy and assets that cannot be dealt with by a will
  • Tax issues, including CGT, GST, Division 7A, superannuation and so much more
  • Probate, the role of executors and estate law considerations
  • Other considerations, like control of entities, digital assets, social media accounts and disputes between beneficiaries

Host: Robyn Jacobson, CTA

Guest: Ian Raspin, estate taxation specialist and Managing Director, BNR Partners

Robyn Jacobson

Hello and welcome to TaxVibe, a podcast by The Tax Institute. I'm Robyn Jacobson, the senior advocate at The Tax Institute and your host of today's podcast. We love the vibe of Tax, and here at The Tax Institute, we do tax differently. I'll be chatting with some of the Tax profession's great thought leaders who will say valuable and practical insights you may not hear every day. We hope you enjoy this episode of TaxVibe. I'm joined by Ian Raspin, who is an estate taxation specialist and managing director of BNR Partners, based in Melbourne, which is specialised in the taxation of deceased estates since 2008, provides estate taxation, compliance and technical advice services across Australia exclusively by referrals from legal practices listed on public trustee companies and by direct appointment from the Supreme Court. BNR has one of the only dedicated teams of accountants in the country who specializes in this neat and often complex area of taxation, which frequently involves cross-border estate issues. Ian is highly regarded nationally and internationally on estate taxation matters as a published author, as a frequent presenter at legal and accounting conferences and events across the country. Ian also consults with the professional associations, government agencies and regulators and the private sector on estate taxation issues. Ian is a chartered tax advisor at the Tax Institute, a fellow of both CPA Australia and CAA NZ, a current sitting member of CPA Australia's Tax Centre of Excellence for Registered Practitioner at the Society of Trusts and Estate Practitioners, of which he is the current National Chair and a graduate member of the Australian Institute of Company Directors. Ian, welcome to TaxVibe. Great to have you here.

Ian Raspin

Wonderful to be joining you again, thank you for the invitation.

Robyn Jacobson

So, Ian, you've certainly established yourself as one of the preeminent experts when it comes to the taxation of estates and related matters. And we can draw back on a very famous quote from 1789. I don't think anyone who works in the tax profession, who hasn't had this one and many outside the profession, from Benjamin Franklin, and he said, ‘Our new constitution is now established. It has an appearance that promises permancy. That in this world nothing can be said to be certain except death and taxes. And you've very successfully combined the two.

Ian Raspin

Growth industry at that too, Robyn. Great, great quote.

Robyn Jacobson

So what makes this area of law so complex?

Ian Raspin

Great question. And really, I think we need to sit back and look at it and say, well, as tax practioners we are working with federal tax law, so, you know, Income Tax Assessment Act, but a state law is a jurisdictional base thing. So every state in Australia has their own jurisdiction or staff succession law as well as the trustee act. So it's an interplay between tax law, the Income Tax Assessment Act and those particular areas. You overlay that and say, well, the income Tax Assessment Act has particular provisions in the way that deceased estates are actually treated and estate actually falls into Division six of the act. So it's treated like a trust, but by default that creates a whole heap of technical nuances when it comes to deceased estates. So it's a combination of those sort of areas. We also need to be, I guess, judicial changes in our interpretation of law. The location of the beneficiaries and the LPR also changes the domicile and treatment of assets and tax purposes out of that and believe it or not, the circumstance of the deceased are their wealth, what structures they've got that wealth in their migration patterns. Where were they when they died? How does that interplay in relation to this area of tax as well? And I think overlaying all of that, you've sort of got to go well, complex area that's probably not appreciated by many practitioners, but at the end of the day, that is there is ITII guidance out there. Some of that guidance is dated and some areas and it's sort of lacking in relation to that. And look, I think in that sort of area that things are progressing very quickly, whether it's generational wealth transfers and growth and in death rates in Australia. So it's an area that needs quite a bit more focus I think.

Robyn Jacobson

And the expertise of practitioners, how specialised or otherwise do they need to be to work in this space?

Ian Raspin

Look, I think a lot of it starts with the Manila estate where with things are black and white and it's pretty straightforward. You know, mum and dad were guys a hassle? I'd be a bit of money in the bank on the share portfolio and that's that's about it. And prima facie, again, it's a pretty simple estate, but embedded into that, there's a lot of potential through tax nuances and traps that come along with it. And what can seem to be very simplistic can soon become quite a complex estate and given numbers. United Small Estate. The risks probably pretty small. If it's an estate, tens or hundreds of millions of dollars, all of a sudden the risks exposures and those levels are quite high. And one of the nuances I guess with deceased estates is that the LPA, the executor, administrator or whatever title might be given in that particular case is personally liable for tax. And, you know, they finalized the estate administration, their liability remains. It's not on to the beneficiaries. And so if something goes wrong, that means that those people will be turning around to their technical advisors as to what's actually go on here. So I think an awareness of these areas are really good. Know what you do know and what you don't know? And to reach out when you get into some of these technical nuances and every day I'll reread the legislation around provisions I know just to make sure that things navigate their way through the way I think they should on a particular matter.

Robyn Jacobson

And to give us a sense of the scale of the number of estates you cover each year, what are we talking about?

Ian Raspin

On average, we'd be doing with about 5000 estate tax matters a year across Australia, which sounds like a very large number. But when you sort of break that down and you say in Australia last year there was just over 190,000 deaths in Australia that's an average of 521 deaths per day. You know, so many dealing with a fraction of the market. But I think if you start looking at that too and you go, well, a lot of those estates are just going to be really simple estates, age, pension, not much else. That's a nice easy estate to just off. So that deals with the majority. But there are the others and that's where the Frankenstein monsters are, is for the Paid Representative Tax Institute. Just a couple of weeks ago.

Robyn Jacobson

As I go into this next question to you, I just want to set the scene, because sometimes terminology can be a bit confusing and there is a whole different language when it comes to estates. So, for example, we talk about someone who dies intestate. And I want to make it clear, I didn't say interstate, it's interstate. You might be interstate when you die intestate, but it's about someone who doesn't have a valid will when they die. Now, that itself informs the terminology we use because we've already mentioned the other legal personal representative, which is effectively the trustee of the deceased estate, the trustee of the trust. But it breaks down into further terminology. So if you die with a valid will, you have someone who is called the executor. And in fact, the executrix, if we're talking about the masculine and feminine version of those words, whereas if you die without a valid will, holds an administrator, and again there is a female equivalent of that. So in our space, we often see accountants taking on the role of executor for their clients. And yet you've seen a trend by many legal practitioners who in fact decline copies of invitations from their clients. So what are some of the risks and why do you think the lawyers are perhaps moving away from taking on those roles? But we're seeing accountants still taking that on behalf of their clients.

Ian Raspin

I personally won't take on the roles any longer because I become very much aware of what's involved here. I think to the legal fraternity, you know, remember a while ago there was one year I attended. I regularly speak at law courts across Australia. The three conferences in one year where somebody got up as a presenter and actually lectured a roomful of lawyers, that qualified lawyers that specialized in this space with their master's degrees or specializations, accredited specialists, and telling the audience not to act as executors. The risks in the area are phenomenal and thus look at it and say, well, look, if the legal fraternity at telling people that understand law and are actually qualified just in this space and focus in this space not to act executives, well, why would another professional stand into that place like an accountant? We don't understand that most accountants would not understand or probably haven't read the succession Law Act in their local jurisdiction, let alone understand the terminology. You look at it and you sort of go, Well, am I covered? And this is a really important one for a journalist to be looking at. Am I covered by professional deputy insurance? And when you look at the PR cover for me, accounting firms, you are not covered to act as an executor. So it's a personal responsibility, not a professional responsibility, right? You will be held paid professionals standards in relation to acting in that role. So a number of times I can give examples where I saw practitioner will act as an executor and the impact on their practice from doing so is just phenomenal. You only need a simple family maintenance claim against the estate and you find yourself in court, know, defending the estate and the world against those sort of claims. And so much of your time and energy has gone to that you're not really qualified to do and you're getting legal advice to be able to do that, that you drop the ball around your own practice. And I've certainly seen practitioners suffer significantly from taking that so wrong. I advocate very strongly that probably not to look at it. It's very nice. You know, a client comes in, they'll be the client for years and you go, Well, hey, you know, you act as my executor again. This is a major, major honor, you know. Yes, I'm happy to do that and help tie the family together. But again, you can do that, but you might find yourself in a fight with next generation. Then you end up with no clients. Right.

Robyn Jacobson

So it could be better to keep your arm's length and charge for your professional services as you need to, but not get legally involved in the arrangement.

Ian Raspin

To find someone else. Now, more so where, you know, people will actually say, I'd like you to refer to my accountant X, Y, Z for advice on this matter. Therefore you can go looking to charge those professional fees as an executor. You might be an executor or a commission born into the world, but it doesn't mean you're actually going to get that commission. It's open to challenge by the beneficiaries in judicial interjection. So it's not necessarily a cash cow. Some people think it's going to be.

Robyn Jacobson

So moving on to some broader estate issues I've already discussed with you, we have people who die with and without valid wills, but I often feel there's a perhaps a false comfort that people get by having a will. They think that it kind of deals with everything. And in fact, there are quite a number of assets that you can't deal with through your will. Can you give some examples of those?

Ian Raspin

Oh, absolutely. And really good point. You know, particularly for some practitioners out there that are trying to have those discussions with their clients around estate planning. Superannuation is not part of your estate unless you get a binding death benefit nomination to pay to the estate or the deed is hard wired for it's county estate. That's often an estate planning technique not to have it part of the estate, particularly if there's a second, third or fourth family. Nobody knows about their assets holding companies or individuals, trusts, family, trust. That is, they don't form part of your estate loan accounts to those entities. Well, maybe the assets within a company that owns a whole heap of real property, you know, you won't own the real property. You own the shares of the company, but it doesn't give you the right to actually transfer that real property in the company to a particular beneficiary and of course, jointly held assets. The rules of survivorship can come in here where the asset actually moves across to the surviving spouse. And so it's a matter I think it was sitting down and listing what the assets are, who owns them. So estate planning, working out who's ultimately are they an asset to which a will can actually control?

Robyn Jacobson

It's an interesting one because if you have, say, a couple who are both killed at the same time, so let's assume there's a car accident and they're both killed instantly. The law of survivorship, where you've got one person leaving their estate to the other and vice versa, you've got a tiebreaker needed because how do you work out which model you invoke first? And the law says that the oldest person is taken to die first.

Ian Raspin

Exactly right. So marry somebody older than yourself.

Robyn Jacobson

All right. So to superannuation, we talk about the role of the Biden death benefit nomination. Now, you could either arrange to leave all of your superannuation benefits directly to your estate or of course superannuation being a trust in its own right. You can direct the trustee of the fund to pay those benefits out to nominate a beneficiary. It strikes me that in recent years we've seen increasing litigation, often involving, as you say, the second, third and fourth families that people didn't know about. I'd like to think people did know about the vote anyway. So in terms of that litigation, it's often two generations that you'll have, if you like, the current partner and perhaps the children of the first or former partner. And it can lead to some pretty ugly disputes between families.

Ian Raspin

Are hundred percent. In fact, the Law Council of Australia, you know, started a few years ago that this is the biggest or one of the biggest growth areas in litigation in Australia and that is around the sister states and super is part of that. You know, beneficiaries going after executors or going after each other or going after professional advisers. Litigation is rife in this area, people trying to obtain what they rightfully think is theirs and recipients start looking, well, what's the binding death benefit, you know, executed in accordance to the terms of the will and not the will? The trustee wasn't in the right format, was it actually submitted to the trustee? You know, there might have been completed, but was it ever submitted or acknowledged it lapsed.And so all these sort of things into place through there. So a very, very complicated area in which professional advice is very much needed. But yes, a lot of litigation.

Robyn Jacobson

In terms of administration. When you very briefly outline the concept of probate for those who may not understand it and for those who don't have a will, because probate suddenly where you do have a will is called matters of administration.

Ian Raspin

So it's an application of the court. So the Supreme Court, in the relevant jurisdiction, you make an application and effectively turn up with will. Your Lloyds ends up with where we make an application. And the role of the court, I guess, is to determine whether that's the most current and valid will and therefore the appointment of the executor. And by getting that in the case of a will, by getting your letters or a grant, what actually happens is that's effective your license now to go and deal with banks or the assets or to represent that particular party in the case where there is not a will as you sort of said, that's an intestacy. And so that goes down to the last administration and as a ranking order is who can actually apply for that. But you go on to make an application as administrator and effectively the same sort of thing. It gives you a license once the courts are allowed you onto that or appointed you to act as the administrator to deal with those assets. I think what's really important is to concepts here. One is that once appointed, it's very, very hard to get out of it, to renounce will be removed. So once you're in there, you're always in there. And secondly would come in that you intermingle with some estates that as you actually start to act as an executor, even though you haven't been formally appointed, you may actually be deemed to be the executor, and therefore you may end up in that role, but you don't want to be particular in. So I think it's really important to not intermingle with the estate during those early stages until a grant has actually been provided. Third thing outside of that is just in every state of Australia except for Queensland and these are required Queensland, you don't necessarily need a grant of probate to be able to act for the estate. So again, that sort of goes down to every state is different.

Robyn Jacobson

I want to play back to your remark then about that period in between. We know that when an estate is beyond the stage of probation, it's being administered. It is, if you like, a regular trust. Now there are special tax rules that apply as to how the incomes taxed and so on. But broadly, we're into a tax base where it has to lodge a tax return, it gets its own TFN and you either distribute the income to the beneficiaries or the income's retained on the assets to the trustee at a special tax rate. What about the period between the date of death? So when the estate begins to be administered now that could be a period of months or even years and legally owns the assets in the meantime.

Ian Raspin

Good question. And that'll come down to a state by state jurisdictional basis. But generally you will find that will actually exist within the public trustee around Australia. But there's no no active role where it's this thing just sits and idle. It's all, you know, often a grant is actually provided to then the executor or PR. It's got LPA as the term for executor administrator. It's sort of a joint term. They still retrospectively become responsible for that all the way back to the date of death and need to deal with the tax returns, etc., during that period. So it's not once they've been appointed, once they've been appointed, it's not like you can wipe your hands and say, well, that was at eight months that we don't have to write that. Now, you still have that responsibility retrospectively.

Robyn Jacobson

There's a whole lot of administration, and I particularly at this point, want to go into the TFN for the estate and DE-REGISTER and GST and ideas, but there's certainly a lot of bureaucratic process that needs to happen from that perspective. In terms of notifying the ATO and receiving the administration of the estate, what are the issues that need to be considered here?

Ian Raspin

Well, there's an obligation to actually notify the ATO death form. So simple form, you need to notify the ATO death and nowadays that needs to be submitted to the ATO. Sadly, in hardcopy it needs to be sent with certified copies of will, probate, etc. Along with that, the ATO has a little bit of a problem and it's time that you bring that up because you know, you need to submit this to the ATO to prove that somebody died. That makes sense. They want to know somebody is dead before they actually, you know, provide access to the ATO portal, etc.. Right now this process can take 3 to 4 months with the ATO. Not only that, even though in my office, again we deal with a large volume of these, you know, you send them in, we'll do it by certified mail where be able to track it's the ATO that it's physically been received by the ATO, but then it falls into the void and often we had one matter just this last week we've done three different submissions for the same estate in relation to date of death notifications, because whilst we can prove it's been there, it's just been lost. There's no lying issue here. That's certainly creating a lot of social media attention at the moment too. And that is that you said that you need a certified copy of the will and grant, etc.. Well, lawyers are signing those. You know, you act for a client you've drafted. Well, you've now they've died. You've got these documents, you certify, you send them in either through us or through your accountant or directly and the ATO announcement around and saying, well actually there's a conflict of interest there. You know, you've acted for the client, we can't accept you certifying this document. And so that's creating a backlog on this sort of stuff as well. So once you get through all of that, you can then get access to nowadays in the deceased's pre-death area on a portal access. And obviously as you and I have spoken about previously, that was an issue for a few years. Then we can certainly access that and apply for an estate to and start that process. But until that point, it's an offense for the ATO officer to speak to anybody around a person's tax affairs that they don't have authority for. And it's a sexual offense that carries a two year jail term, but for the ATO officers, so they take this role very, very seriously. So you have to jump that hurdle before you can really start interacting.

Robyn Jacobson

You talked about having to notify the ATO of the death toll signature and not receive information from the Registry of Marriage.

Ian Raspin

Robyn, I think he just playing with my buttons here today. Yes, yes. So there is data sharing and this is one of the areas I think is quite frustrating that certainly does interact with the registry of marriage, births and deaths right around Australia. Again, a state by state or territory based jurisdiction thing, but that just doesn't seem to correlate into this area here. And whilst there has been recommendations by our Inspector General of tax the get away from this area up and through to explore this that certainly hasn't happened. And as far as I'm aware, saying not on any immediate ATO radar list, I'll take that. It's helpful to Robyn and it's a sad indictment because sort of set of a lot of the states are very simple and small and you know, this is surviving spouse that needs access to that money, those kids that need access to the money, maybe 30 or 50 grand. But, you know, by the time you get a grant of probate, you go through, notify the ideal things you might be a year or two later before you can get that out. The process should be a lot simpler for those simpler estates.

Robyn Jacobson

And that has real ramifications for beneficiaries.

Ian Raspin

100%. 100%.

Robyn Jacobson

So the Inspector General of Taxation and the Taxation Ombudsman, Karen Payne, did release a report in July 2020 titled Death and Taxes An Investigation into ATO Systems and Processes for Dealing with Deceased Estates. And that investigative report is on Inspector General's website. What have we learned out of that investigation?

Ian Raspin

Great [ ], investigation by the campaign at her office, the inspector general on that, and to commend the office for the work that went into that. But I think at the end of the day they raised some very pertinent points and the ATO has responded to a number of those points and has acted in parts of some of those points. But I think there's still some serious work there to be done and trying to build that space up and to bring all that together. But I think in the scale of things and to the Commissioner's sort of defense, I mean, the tax revenue, as I understand it from the space is about 4% of tax revenue in Australia that comes from deceased estates. Currently it's growing. And so the focus of the ATO on these areas aren't necessarily as large as it is, but there are holes and chance reports, certainly points some of those out and I think it'd be good to see a little bit more traction from that report.

Robyn Jacobson

We'll keep an eye on that one. Now, in terms of the tax issues, look and you and I could spend the rest of the day talking about this stuff, but let's just perhaps pick on a few of the high points we've got to trust. Let's assume that we are retaining the income while the estate is being administered. We're not distributing assets or income out to the beneficiaries at this point. In a sense, we've got the normal rolls in Division six, in part three of the 1936 Tax Act. That is, the trustees assessed on that share of the trust's taxable income. To the extent that no one is presently entitled to the trust income, there are special rights. And what do we do when it comes to resolutions? Do we still do them when it comes to a deceased estate question?

Ian Raspin

So, yes, look, a couple of things. There are special rights. It's Section 99. So ordinarily, our listeners will be aware of Section 99 rights which apply to a trustee of a trust, and that is tax rights all the way through context to the stage two state section 99 rights apply at the commissioner's discretion. He generally use that discretion if he lodge the returns on that basis, and that will apply for the first three income tax years after death. So if I died on the 1st of May, my first income tax year would only be two months. Okay, so two years and two months. And that effectively Texas's adult marginal tax rates the 18,200 tax free providing it's a resident trusts estate and not a nonresident trust. And thereafter Section 99 rights will apply. But without the 18,200 tax rates are still progressive marginal tax rates. But I go back to my point that it's at the commissioner's discretion and he can invoke 99 rights at any time that he believes the estate administration has been delayed intentionally for tax advantages. I don't want the example. We have every beneficiary in the highest marginal tax rate, so they want to try and take advantage of the longer years. And so I really, really caution against that.

Robyn Jacobson

If you've particularly seen that in practice when 99 has been used instead of 99.

Ian Raspin

Per cent of [ ], and I've seen cases where it really should be invoked and I say in a live case no, because the way we practice and I guess the trustee companies around Australia practice and we consult and work with, we certainly adopt a more considered view on that because you'd be exposed as an executor if she did something like that, the beneficiaries may come after you. I am aware that there are practitioners and practices out there in Australia that are taking advantage of these provisions and they bear the risk. I guess is the best way I can respond to that.

Robyn Jacobson

Question, what about resolutions? Are they still needed?

Ian Raspin

Yeah, look, I think so. As a tax ruling, I tell you, 2622, very outdated ruling. It came out before self-assessment in Australia, certainly. BANFIELD And in an Australian tradition. So it certainly needs to have a right, which I think at the tax conference last year, Robin, the ATO representatives did say there were close to releasing a redrafting my take 2620 to understand it's on backburner now but that sort of talks around stages of administration and divides the estate into three stages. So during that stage where you're trying to work out what's going on, what the assets, how the liabilities, get a grant, etc., all incoming as the trustee, it's a it's a matter of that ruling matter in law. So that's clear middle stage. You're in that stage where if you make an interim distribution that's were beneficiary of income, they would be assessed on their share of trust income. And the final stage, obviously, where you've got to the stage that you've basically administered the estate, you might not have transferred assets, but you can say, well done, everything. Now I've put money aside to pay for tax pull out. Now I've got to do is to transfer assets. At that point, beneficiaries can be presently entitled to income. I'm a big advocate, however, the sort of game I think doing resolutions around present or specific entitlement, particularly specific entitlement are absolutely paramount in this space, particularly for the larger states where you really want to clearly demonstrate what the intention was. And again, it comes down at risk. Then in failure to do that, you know, the trustee will be assessed against that capital gain or that income. And it was a capital gain, for example, or a beneficiary had a capital loss or it was a not for profit beneficiary. And I said, for the not for profit sector are shaking down the market at the moment. They will come after executives and advisors for not doing that. So I think best practice is definitely to look at that and say, no, let's, let's do a resolution, let's get this correct. That's really document and demonstrate what the intention of the LPI our trustee of its testamentary trust is at year end in relation to both those areas.

Robyn Jacobson

Let me respond to the notion that a deceased estate would be regarded as a fixed trust.

Ian Raspin

Or another really good question. So really the fixed trust sort of thing during the estate administration stage? No, they can't really be a fixed trust until the end of the state administration because, one, you don't know whether you're insolvent. You know, a person may look solvent, but they might have a couple of million dollars worth of debt. You know, it's in the background that nobody knows about. There might be ATO history you don't know about and you don't know whether you can distribute. So it's only in the final year of estate administration that you can actually turn around ground and go, Well, is this a state, a trust? And in that final year, certainly you could argue you're that's final stage. You might have beneficiary offshore, for example, entitled to the capital gain from a nontaxable Australian property. You could try and argue that that was a fixed trust at that point. And certainly we've got some rulings with the ATO where that's actually been confirmed. I will 540 which effectively means that if the fixed trust are to which the nonresident beneficiary is in receipt, the trustee wouldn't be taxed on the non taxable Australian property portion of that distribution. But I think it's sort of one of those areas that I would never take for granted. Certainly the trust sector right across Australia, wiseguys for rulings and those sort of areas as well to to make it there. And given the delays in getting proper rulings at the moment of the ATO, you want to make sure it's a sizable amount of money before you started delaying processes.

Robyn Jacobson

Division 7A, another area where of course across the country and across private companies there are some very substantial sized loans. Yeah, even the old quarantine ones, those were made prior to the 4th of December 1997, when Division seven commenced. They are still liabilities that are effectively owed by these individuals. I don't know is regarded as such, but an asset that is receivable by a company by definition means that it is payable by the shareholder or the associate. So when they die you do have to consider the implications of that line. So briefly, can you talk us through what happens when you've got a line that inside back to a private company and it hasn't been repaid? Does the estate then assume that liability?

Ian Raspin

So yes, and this is a really complex little area that sort of dies out. So if you had a the estate does, so the executor effectively stands into the shoes of the deceased and so you become the deceased for all intents and purposes. So that for tax purposes is a separate area, a separate tax entity. So any individual seven guideline agreements that are in place when that person dies, an executor needs to continue to meet the obligations of that division, separate loans through the estate administration, and that is to pay the minimum amount with interest, etc., all the way through back and finally to do that will trigger a Division seven dividend to that extent, which is a little bit of a problem. It's interesting, though, that if a deceased died and let's say there was a loan and it was taken out in that year of death and in that particular case there, they hadn't actually entered into a loan agreement, but the company's tax return lodgment date hadn't come to light as yet. Well, the taxpayer hasn't had the opportunity to enter into a Division seven guideline agreement. The APRA is not obliged to do so. And so whilst yes, it's still an effective line back to the company, it falls outside of the scope of Division seven provisions. And so you've got those sort of areas through there. And if it happened during the loan and the estate was compliant on the way through, you know, the deceased was two. Again, you don't have that issue. But as an executor, if you sort of students the shoes of the deceased and you go on, okay, well, we do have this loan agreement. Are they retrospective years? What was non-compliant? You had that obligation to look backwards and go, well, three years ago, we failed to make this right. We need to go in a minute, depending on your amendment periods, because it's a real issue and we'll see. Often people will draft wills where they sort of, I think, give these lines, you know, either way. And they try to clear things up. And we just got to watch their, I guess, the commercial debt forgiveness rules, etc., and the implications that they could have on it. So a really, really important area to look at up on the other side, Robyn. You know, that's an estate asset and so that's an asset that could be called upon or should be called upon by the estate or the administration. It might be an asset that they pass across the next beneficiary like an upper until they've lost trust as opposed to calling it in and effectively maybe causing the trust to collapse. This is where it starts to get a little bit more nuanced and we need to sort of really sit down and have a look at what's going on.

Robyn Jacobson

With other thoughts. You talked about the commercial debt forgiveness rules if the loan is forgiven, but if it's a Division seven alone and it's forgiving, you could actually just have a straight deemed dividend and depending and on the estimate itself, my other thought was if your loan is big enough so you might have the beneficiaries, the family who think I we're going to be inheriting $5 million from the family member who's passed away. But it turns out that there was a $6 million loan back to the private company. So, in other words, when I say back to us, the money was went to them and that's a liability. So you may actually have an insolvent estate because by the time the loan is discharged, you may not have any net assets left over.

Ian Raspin

Also say whereby the shares in the company are being gifted to one party and the residual beneficiaries who thought they were going to get in. Your example, $6 million end up with a Coke bottle at of time that loans going back where they all went up one person.

Robyn Jacobson

So even if the loan is repaid which effectively depletes the value of the estate if they become the shareholders of that company, then effectively all you've done is convert a receivable in the company into, let's call it cash back. But if it's other shareholders who take over the control of that company, then the benefit of that line being repaid goes off to somebody else, as you say.

Ian Raspin

So it goes back to our early conversation around litigation. Now, this is the massive area of growth of litigation in this area, and that is if you're say you and your brother were in that scenario and it all went to you and your brother began, Well, I actually I should get everything this was never the intent. I've got to go and challenge the will. I've got to take the executor to court. If that executor happens to be one of our members, well, they've got to be in court for the next 12, 18, 24 months, whatever it is trying to argue that as opposed to focusing on their practice, unintended.

Robyn Jacobson

CGT, huge area when it comes to estates. And again, there's so much to unpack that we can't possibly achieve in our short time together that we of course have rules around the date of death being pre or post CGT post 85 we've got when the asset was acquired, how the asset was used. There are special rules for the CGT discount and of course we've got all our main residence issues as well. So and in fact you and I have run sessions together talking about mine residents. So this short time we have. What do you see as the key aspects or the key considerations when it comes to the maintenance.

Ian Raspin

Of things for practitioners to put in their mind? And that is that to the extent that is the main residence of the deceased at date of death, you get a market reset at that particular point. But one of the requirements is that it's not income producing a date of death. And so I had a case just this last week whereby, you know, it was a property mum had that she was living in her property, but the granny flat out the back was rented to a third party. So all of a sudden we have a problem because it wasn't primarily used for her date of death as a principal place of residence. So to that extent we can get that uplift. I think that's really important to look at. But then you've got to step back and go, well, what was the size of the property? We had one and Toorak of all places, and you go into our problems, it's going to influence the exemption size of two hectare exemption. Well, this lady had actually acquired just over two hectares of land and we put an African mansion down a track. And so, you know, point whatever percent of her estate was now subject to capital gains tax when her main residence was sold. And again, the amount of tax in that was quite considerable, let's just say just over six figures just on that small proportion. And again, if you failed to pick that up in an active audit, they didn't match with title officers. They lost more than two hectares executors going to where that and I can't go after the beneficiaries Brown's case 950 whatever it was they'll come after your cover. So it's about sitting back and going, okay, two hectares, is it under that? Yes. Do we get the market uplift? Yes. Were they a resident or non resident when they died? That changes the entire dynamics but one but yet again. And then looking at it and saying, well, proportional rules, you know, days that it was main results versus days it wasn't main residence and the ability to be able to access those provisions as well. Also very important. I think the other thing that I'll be saying there is that and a really interesting one that's often missed is that, you know, you have two years from date of death on which to sell a principal residence without triggering CGT as a concession. It used to be 12 months and often it's two years. They've now come out with a peg which allows you to say, Gee, six, 19, slash five, I think it is, which allows you to extend an additional 18 months on that in the Safe Harbor rules. So looking at those and sort of going well, we saw it as sort of two years. Do we now have another 18 months? Do we make those rules? If we don't, doing it's going to get a private ruling by the commissioner, you know, to protect that the parties that are actually involved, a really important sort of considerations as mine residency rules to step up to market value also attach themselves to any private residential property. So if you had a couple of investment properties that were pretty five that were owned by the deceased, now you get market step up as a daily death as well, but you get two years to sell them without capital gains as well. So you might be as so say three properties in my example without CGT consequences within two years, without a death.

Robyn Jacobson

In the situations where you don't get the market value, uplift in cost base for whatever reason, it could be that within fact got it high CGT property that wasn't solely a main residence, for example. There are going to be enormous challenges in identifying when it was acquired, what the cost base is. And imagine this three chains of muscle chains of estates. So, you know, I'm very good at my record keeping, but I know that plenty of people are not. And so when you got someone who bought it as the home is on the ever used it for their home but let's say they were renting out the granny flat at the end. Suddenly you can't use the market value rule on death. So in fact, we've got to go back and reconstruct the cost base. How do you manage that? What do you do with the records?

Ian Raspin

It's horrific. We had an estate for about three years ago and I think they had about 15 properties in this estate and they were all being try. And so I think we're in the fourth, we just heading into the fourth generation. But these properties have been a series of, you know, fairly quick deaths that had happened through this family. But those properties had all been used for different purposes through the years as main residence for different people and different things. And it's a matter of tracking that back and being able to work it out where it is. And I think a really important note to our members is to say that when you lodge a tax return, not only is the client saying it is true and correct, but so is the taxation. And so if you can't backtrack on that and I've had many a scenario where you can't you can get to the titles office from most jurisdictions and get a detailed research which provides you the cost base of the property, etc., not necessarily the duties that were paid on all the legal costs. Nothing around the swimming pool that was built in the backyard or capital improvements. You put together what you can and sometimes it's a matter of going to the commissioner and saying, look, vulture disclosure, you know, basically we've got everything we can here to pull together on this. But this is what we've got to and I'm a big advocate to say that, you know, adopting a more conservative approach, particularly, is the opposite. Personally liable is probably the better approach. And government commissioner putting a position up to say, well, look, basically this is the best that we can possibly do. Can we get some effectively coverage from this? We've agreed to these terms and therefore, can we pay the tax on the settlor and settle the estate administration without leaving the executor personally? But, Robyn, that that opens a paradox. There are issues, too, because these are historically, you know, lots of senior tax counsel around the country, etc., that do work in this space. You know, they watch these sort of voluntary disclosures to the ATO, and we've been out to settle millions of dollars worth of tax debt across Australia with the ATO on these matters, on many, many estates. And it's a bit of a change of practice in the eighties at the moment where they really push back on such voluntary disclosures around assist states, and I'm not sure whether that's an administrative practice, but somehow states have sought, according to within the aggregate, whether it's a broader issue that that in itself is relying on state administrations as those parties are actually now having to grapple. Well, we can't sign this tax return because it's perjury, but we can't administer the estate because we to be personally liable, that's going to clog up the judicial system in Australia as people go for court directions to be able to take themselves on that or they're going to continue fine with the ITII in trying to release those. So that's an area we're actively engaged in some discussions with the ACA at the moment, but if you can't sign it, it's not correct. You need to open up the door ways to try get that certainty.

Robyn Jacobson

As we say, we've fallen short on what we would like to have as the documentation or the tax position. Can you help us out?

Ian Raspin

Correct. Yeah.

Robyn Jacobson

Look, there is one shining light in all of this doom and gloom that we've been talking about and try to reconstruct records and those tax liabilities, those who pass away, who still owe a hex or helped debt. It's one of I can think of two things that go to the grave with you. Apart from any personal belongings, capital losses and tax losses cannot marry for to the estate or the beneficiary. So they go to the grave with you. Now, that's not a good thing necessarily.

Ian Raspin

It's very, very pertinent observation. As I say, too many tax practitioners where matters are referred to as post their work that send a message that they can't use those losses in the estate. I think.

Robyn Jacobson

They're gone. But so as you [  ] you help liability. So there has been some talk over the years about possible legislative changes which haven't proceeded. So the current law remains the case that when you die out, the liability does not pass to your estate or to any surviving beneficiary of the estate. It goes to the grave of you. It's completely white.

Ian Raspin

Now, it's an interesting topic. In the year of death, the executor still have to pay up to the date of death in a proportional sort of basis because the personal still life and they have it. You're right, the debt's written off. And you also make a good point. There's been many discussion around that's not fair. It's costing the Australian economy so many dollars and significant amount of money. But I think we need to sit back and this is where it always sort of starts to pull back on and to say, well, who are the parties that that debt is? And you know, we all think every day, you know, it's you know, when you turn 80, 90, 100, whatever, by accident or something, you're going to die. So it's an aging population that many has died. I a car accident 30 year old you know suicide 35 year old fire. All these incidents like that, young people die and these people are often just recently married. They leave a spouse, maybe two or three kids, you know, maybe a mortgage, maybe nothing, maybe maybe they were living on the brain, borderline.And there's an extent and there's a little bit of superannuation or a little bit of something coming in. So it's probably not a good example, but a little bit of money there that could help that family significantly. But if it has to go unchecked, it and that's why this thing keeps getting pulled back. But it is still very much a lot of discussion. Your 100% are on.

Robyn Jacobson

A bundle of issues to wrap up with things like control of entities. So we've spoken about how you might own shares in a company, but you don't personally own the assets in the company. So the role of the director, the trustee, the appoint, all those office holders that control entities, this doesn't automatically pass to the APRA, does it?

Ian Raspin

Not at all. And this is again where estate planning, particularly space, is really, really critical. I recommend going to an accredited specialist or a member of Step Society Trust. And so practitioners there, people that just do it's not general practitioners that I guarantee GP the documents need to be provided. You need to have a look at the trustees on the constitutions. How does control really pass? Is it possible to hardwire that in the will do you need to change, you know, the constitution of the company to be able to make this happen. And in a maybe and I've seen this happen to where, you know, the deceased is a sole shareholder and director of a private company that employs people, dies. How do you pay the staff? You know, if there's nobody in control of this thing, like how does this sort of get dealt with? And this sort of issue is live issue. And it's a matter of addressing this as part of estate planning and working out how it goes. Now, an example such as that, arguably, yes, the estate will inherit the shares once you get a grant, a probate three, six months later, you know, ordinarily you could then you have the shares you can vote your self in based on those shares as director. But you got my staff left. They've all gone walkabout. So I think it's really important to look at that. But also situations and we've had situations whereby there's a company in the state is no control there. But at the end of the day, you know, we had one here in Melbourne whereby the family thought this guy would support, you know, those $1.3 million in their bank account. His company, the estate got the shares. That's how we found out about it. But it was like, well, hang on a minute. What does that money come from? They all thought he was doing nothing since drugs, this is people trafficking where they come from and like, holy cow, who wants to be director of this thing? What liability or responsibility you want to take. So they sort of issues are really pertinent to be part of the estate plan.

Robyn Jacobson

What about digital assets, cryptocurrency, social media accounts, other digital assets that have wealth that are sitting in these accounts? To me, the control and being able to access those accounts is a crucial feature and very much an emerging issue because a lot of people are getting into this space.

Ian Raspin

Then very much an emerging issue and. You're right, the control of those things. How do you get that? You know, Facebook, for example, I believe it varies jurisdictions, you know, they block that. They won't pass it on to an executor. Okay. So as far as what sorts of things in there that all of a sudden you can't access, so you're not necessarily dealing with Australian law, you dealing with different jurisdictional law in relation to the grants of access and agreements that people have just ticked as they are into these environments that they haven't read the detail or ever considered. And if there's some real intangible assets within some of these areas, that needs to be considered as part of the estate plan, it's that about access. You know, you sort of turn around and say, well, somebody has got a few Bitcoin, you know, IP worth half a million or ten, 20 mil, who knows? You know, but how do you pass that across? How do the coding to be able to get access to that on the Keys? And you know, there's a law conference just last week, two of them actually speak at regular law conferences and both conferences. There were there was a speaker talking exactly around this and that we're recommending to lawyers, do not hold the keys to these things in your vote. You do not want to take that responsibly only so these sort of things need to be brought to the table. Our members are understand, I hope, how you know, cryptos taxed, etc. but these are real, tangible assets and they can be some real value in a it's a nightmare. That's an entire conversation at a time.

Robyn Jacobson

It is. Look, so is this next point aging population. So challenges in the next, let's say 10 to 20 years. What do you see as the major issues there are?

Ian Raspin

Look, we've just on the cusp of the largest generational wealth transfer to ever occur. 2019. The wealth transfer by succession in that year was just on $107 billion. By 2050, they're going to say it's projected to be $224 billion one year because all of a sudden you've got all this intergenerational wealth transfer going on. We have a people in Australia, a very multicultural society, so we have assets, beneficiaries, executors, all sorts of things in and out of this jurisdiction all over the globe.  And we're one of the most multicultural countries in the world. So that into place. And so to me it's really the issues and the challenges in the next few years is one of the biggest growth areas litigation going on biggest in the generational wealth transfer a recurring the complexities around structures and things that are people have got their overlay with international jurisdictional sort of play on all of these across all of those parties involved in an estate and the assets and tax law that really needs to be looked at. You know, to me, the sister states, because it was kind of it was logical at the time you and I formed part of Division six antitrust provisions, but it doesn't necessarily make sense to be there. You know, we because of that, we fall into things like family trust elections. We fall into nonresident estates. So I could be a resident of Australia.I point somewhere in Singapore as my executor and my state becomes a nonresident estate and that opens up an entire paradigm of new tax issues there. Go to the UK, the residents of the estates determined by the residents to the deceased. So that would stay in Australia. So I think there needs to be an overhaul. I'd like to see special provisions invoked around assisted states in Australia. I'd like to see the domicile put back here, Australia and particularly with a risk to our members around this litigation. It is absolutely horrendous. It's an exciting area, it's a growth area, but there's a lot of a lot of risks and a lot of complexities in there that people need to be aware of.

Robyn Jacobson

And this is within the around 40% of Australian adults having a valid will.

Ian Raspin

And how scary is that, you know, because you love the people around you, but yes, there are rules of intestacy in which who's going to get what? But they need to go and deal with that. If you want things to be uncertain direction, go make a well. It's not hard and I deprecate our clients in our clients, our members, you know, representing taxpayers. So these people are your clients, you know, they're paying you money. One question whether you don't have an obligation to actually try and point them in this direction, you know, go get a will, get professional advice, deal with these matters. Just reverting back to your earlier comment about, you know, what else I see playing out, I think that you'll see a death tax play out again in Australia. I'm not an advocate for it. I think if you look across the OECD world, you know, a lot of countries are actually pulling back from the administration of death duties, you know, gifting provisions in place as well for these sort of things. And administrative costs of running those and all these other jurisdictions often outweigh the benefits of these areas. You know, if you got a 0.5 or 1% move to GST, you might get a similar outcome here in Australia as opposed to the administrative burden of doing the other. But I think politically there will still be a push for this. It does keep raising its head. It's tall poppy syndrome, the haves and have nots, the minority, you know, taxing the upper echelon to to death duties, etc., sort of politically makes sense. It's an election platform or it was an election platform that was lost on a few years ago. I do think we'll see that surface, but it's just demonstrated anecdotally around the globe and I've said countries that do do these things, but it just doesn't work the way it should.

Robyn Jacobson

So and you're going to be speaking at our Death and Taxes conference in Brisbane in early October.

Ian Raspin

That's correct, Robyn. It's a fantastic annual event. I'm really looking forward to that. I'm sitting on a panel up there and I'm really looking forward to the event two day event in Brisbane and highly recommended to our members.

Robyn Jacobson

Terrific look. Thank you. And your insights as always have been so valuable and thank you for your time.

Ian Raspin

Nice to be involved. Thanks, Robyn.

Robyn Jacobson

Thanks for listening to this episode of TaxVibe. I've been chatting with Ian Raspin, managing director at BNR partners. To keep up to date with TaxVibe, be sure to subscribe, rate and review wherever you listen to your podcasts. If you'd like to connect with us, you can find us on socials. Not a member of The Tax Institute, join a collective voice of 10,000 practitioners at the heart of the profession and find out what the best tax professionals have in common. Visit TaxInstitute.com.au, we look forward to you joining us next time.