The heat is on

The tax office has made no secret of its plans to streamline Australia’s tax system. It’s on record as saying it wants to cut hundreds of millions of dollars of compliance costs from the system and has warned accountants much of these savings could come at their expense.

Late last year ATO Second Commissioner Geoff Leeper told the Accountants Technology Showcase Australia conference that tax practitioners need to prepare themselves for a big hit to revenue.

“We are being told by government to deregulate and cut red tape – and form-filling and re-keying of data are classic examples of costs that shouldn’t be borne by the economy – that’s why we are pushing on this stuff.

“The red-tape reduction savings from SBR [Standard Business Reporting], which is a priority for the government, total probably $500 million in the economy. A lot of that will come from professional fees,” Mr Leeper said at the time.

In addition, the ATO has used its 2015 corporate plan to reaffirm its commitment to streamlining the tax system, promising to simplify interactions, maximise automation and reduce costs.

“We are creating digital infrastructure and contemporary services that allow us to engage with clients, each other, and other stakeholders in an online and mobile environment. We are part of, and will strongly support, the government’s digital services agenda, including through the new Digital Transformation Office in the Communications portfolio.

“We are focused on facilitating more streamlined business-to-government and business-to-business online interactions. This will be achieved through increased use of a complete and single source of business information and broader adoption and use of consistent information exchange standards,” the corporate plan says.

However, despite all the talk, exactly how the ATO’s automation will play out, and what effect it will actually have on the accounting profession, remains unclear.

The current state of play

Automation is still very much in its infancy in Australia. Despite some strongly worded statements from the ATO predicting mass change – to date, nothing very significant has actually happened.

“At the moment it probably hasn’t impacted that much,” says David Smith, founder and director of accounting technology consultancy Smithink.

Aside from a few system upgrades and improved prefilling capabilities that allow some individuals to complete simple tax returns faster, automation has yet to have a big effect, particularly for accountants.

“From an individual taxpayer’s perspective, I suppose more are using that system,” Mr Smith says, “and this means that there is less data entry that accountants need to do for their small tax return clients but probably that’s been the thing that’s had the biggest impact.”

Forward-thinking

If not much has changed to date, it’s only a matter of time. The ATO has a clear vision of what it wants and it’s nothing like the status quo.

With regards to personal tax affairs, Mr Leeper says the tax office intends to simplify the system as much as possible. While stopping just short of saying personal tax returns will be made optional, Mr Leeper admits that’s something that is certainly in the ATO’s sights.

“From a taxpayer service point of view, we think it would be great if people with really simple tax affairs were able to, at some point, not have to worry about filling a tax return,” he says.

“On the income side – like income, interest, dividends – we can pretty well tell you right now what sort of relationship you’ve got with government in that space. What we don’t know though, is what deductions [you’ve got].”

To get around this, Mr Leeper says the tax office does have “some ideas” on the deductions side of things, hypothesising taxpayers could accept an offer of a certain amount of deductions – no questions asked.

However, “moving to a no touch return, or no need to lodge a tax return, government would need to focus on what it was prepared to do to make the deductions side of tax easier,” he says.

“That’s an outcome that governments would need to think about, not the tax office, because it does have implications obviously for tax collections,” he adds.

With regards to business tax affairs, the ATO has similar plans for simplicity. The main goal in this space, according to Mr Leeper, is to drive greater connectivity between businesses and the tax office.

“We need to write our tax reporting requirements in such a way that a software developer can incorporate them and business systems can generate information automatically that complies with the tax requirements, so you’re not extracting data from your business systems and entering it into a piece of software which then transmits it to the ATO,” he says.

“The data that you’re generating as a natural by-product of running your business is the data we will use to populate your tax returns and tax information.”

This automated connectivity, according to Mr Leeper, is expected to take shape in the next three to five years.

Automation elsewhere

Australia is not the only country currently exploring a shift towards automation of taxation. In fact, in many respects, Australia is playing catch-up.

Matt Herring, head of tax technology at KPMG Australia (a role only created this year), says Australia is actually quite a way behind a number of countries in many respects.

“In my first week in the role I was actually overseas meeting my contemporaries in Europe, understanding what they are doing and there is a fair bit going on overseas,” he says.

While abroad, Mr Herring sat on KPMG’s global tax technology investment steering committee, made up of relevant tax technology partners from around the world, giving him the chance to gauge what’s happening in this space across other markets.

“Australia has been at the table for a while but only really peripherally, while some of these other countries have really been investing in this space for close to a decade.

“They’re actually quite well advanced and I think that probably matches their regulators, which are probably a bit more advanced than the ATO in terms of their digital transformation strategy,” adds Mr Herring.

Christopher Scott, KPMG’s UK-based head of global compliance management services, says a number of countries, including the UK and Germany, are already utilising automation to great effect.

“If we look at the UK, for example, both personal and business taxpayers are now either required [business] or able [personal] to file tax returns electronically,” he says.

“Corporate tax returns and the accompanying statutory accounts have to be presented in the ixbrl [Inline eXtensible Business Reporting Language] format following an agreed taxonomy.

“In Germany, as another example, companies are required to file an electronic balance sheet, again following an agreed taxonomy.

“Whilst these developments provide certain administrative efficiencies in the filing process, the underlying agenda is to get taxpayer data in a way that enables automated analysis and greater insight than can be achieved by purely manual review processes,” Mr Scott says.

Study abroad

With such dramatic change on the horizon accountants need to be prepared. While Australia’s own tax automation won’t play out exactly as it has overseas there will be similarities, and lessons to be learnt.

Mr Scott says that in Europe, accountants have had to deal with some fairly significant change, but that hasn’t hurt the profession.

One thing he says accountants have had to adapt to has been new technology, both into their own firms and their clients’ businesses.

“The accountants are big suppliers of compliance services and so, to the extent that tax authorities are requiring tax returns to be filed electronically, they have to adjust their process and acquire the technologies that enable them to provide the service under the new conditions.

“In the last few years, we’ve seen a significant increase in the number of different technology applications focused on tax and tax compliance-related processes and tasks. And this has had a knock-on effect on our delivery models,” he says.

Furthermore, Mr Scott says the need to adapt to new technology has also been driven by general business demand for more cost effective processes and services, “and we’ve definitely seen in the past few years the impact of this on the tax function”.

“The challenge for the tax function is the same as for the broader business: are we doing things as efficiently and effectively as we can, what are the opportunities for greater automation and what is the business case?”

While “perhaps counter-intuitively”, Mr Scott says automation has actually been good news for accountants, allowing them to provide additional services and solutions for clients. To the surprise of many, he says, automation has actually had a positive impact on accountants’ revenue, albeit in non-compliance spaces.

“On the one hand, the growth of technology applications has opened up new revenue streams. For example, in KPMG in the UK, we have had to develop new technology and services to help our clients with the requirements to file statutory accounts in the ixbrl format alongside the tax return.

“As another example, the KPMG network has also developed a very successful and market-leading Indirect Tax Compliance Centre in Budapest to centralise the automated production of GST (and other indirect tax) returns. This has undoubtedly increased the revenues in our indirect tax businesses,” Mr Scott says.

Mostly though, it’s clear that increasing demand for value-added services, as opposed to transactional compliance work, is where most accountants have benefited from automation.

“Automation does increase efficiency and so there is an expectation that greater efficiency leads to greater cost effectiveness and therefore reduced pricing,” Mr Scott says.

“However, it is important to note in this context that tax is still a technical process and expert input and judgment is required in the preparation of any tax filing or analysis. Thus, whilst automation has helped greatly in removing inefficient manual processes, it has not done away with the need for expert tax input to ensure accuracy and relevance.

“To the extent that compliance revenues have been lost due to greater automated efficiencies, this has been counterbalanced by increased demand for outsourced compliance services as new models become more attractive at better price points and by the opening up of new revenue streams around process and technology consulting,” he says.

Proceed with caution

Drawing on his experiences in Europe, Mr Scott says there are lessons Australia can learn from what has transpired elsewhere. In particular, he warns the ATO not to expect too much, and not to think automation can deliver more than is currently possible. “On the tax authority side, I think there was, early on, an unrealistic expectation that automated data transfer and common taxonomies was the key to a far richer view of taxpayer data and greater insight enabling better analysis, monitoring and compliance.

In addition to unrealistic expectations, Mr Scott warned there are other challenges too, including additional costs and responsibilities that must be considered. He says that from a simple administrative point of view, the challenges of introducing electronic filing processes should not be underestimated either.

“It will impose costs on taxpayers in terms of adapting their processes and technologies to meet new requirements and, of course, for personal and smaller scale business taxpayers the impact of the online strategy and how it applies to members of the population that aren’t consistently online, for example, the older demographic or rural communities, needs to be considered in order to strike a balance that’s fair to everyone.

“The traditional accountant will need to respond as clients will expect more automation to increase visibility and transparency, and in order to demonstrate the efficiency and effectiveness of the provider’s business model.

“Finally, risk management remains a big issue for the professional accountant and automation brings new issues as well as addressing some others,” Mr Scott says.

FOCUS: Remaining relevant

A streamlined and simplified tax system could have a dramatic effect on how end users interact with the tax system, in turn having an enormous impact on those who advise taxpayers. As such, there has been much trepidation among many tax professionals who are concerned they will lose relevance in an automated system, but the ATO is adamant they should not worry.

“We are not trying to do tax agents out of a role, there are always going to be those questions of interpretation and that question of people’s confidence in dealing with the tax system,” ATO second commissioner Geoff Leeper states.

He says that the tax office is of the strong opinion that tax professionals will continue to play an integral part in Australia’s tax system, something with which Tony Greco, IPA general manager, technical policy agrees.

“People know that if they don’t go through a tax agent they may miss out on deductions they are eligible for,” Mr Greco says.

“Proof is in the pudding – the average claim for refund is higher for people going through tax agents than it is for self-preparers.”

FOCUS: Automation in action

Sweden has been focused on tax automation since the 1980s. Monica Söderlund, head of tax at Grant Thornton in Sweden, outlines how this process has impacted accountants in her country, and what this could mean for accountants in Australia.

How has automation impacted the personal and business tax systems in Sweden?

In Sweden automation started in 1985 and has been under continuous development ever since. Currently automation has been integrated into systems, simplifying reporting for taxpayers.

The Tax Agency [Swedish Tax Agency] has been a key player in the process. In particular, for individuals the process has been very simplified – taxpayers receive a prepared annual tax return and currently more than 70 per cent of them file by a simple SMS etc. For companies, automation is equally simplified where most tax returns can be filed electronically.

How has this automation affected the role of accountants?

The accountant’s role has been [changed to] striving to [participate in] more complex services. However, corporate clients still require compliance services – the accountant’s role is driven to verifying and checking procedures and spending less time on filling in forms. The market for tax compliance for individuals has largely, over time, collapsed, and only persons with complex tax situations still need those services. Since taxpayers need to spend less time on compliance and fees for compliance due to automation, accountants are providing more high-value services for clients.

On a global scale, outsourcing compliance has increased significantly with multinational enterprises in the past decade, and large accounting firms and international outsourcing firms provide international compliance services.

What effect has automation had on compliance revenues for accountants?

Automation has for a long time put pressure on revenues [from] tax compliance, though importantly, tax compliance has never been seen as a core business for accounting firms. Accountants have in a way moved from providing a more mainstream service to high-quality diversified services closely linked to compliance.

What have accountants done to replace lost compliance revenues?

Swedish accounting firms strive to provide consulting in implementing systems and providing advice. The services are generally more about creating value than compliance and hence not subject to the same pressure on fees.

In your experience, has automation led to any issues that other countries could learn from?

Less manual work frees time and fees for accountants to provide quality services to their clients. Moreover, the client knowledge has increased in the sense that automation, when working at its best, guides and supports the user.