The mark of a taxman

In early September 2022, COVID finally found Chris Jordan. Australia’s twelfth Tax Commissioner had been going into the office most days right through the pandemic, whenever lockdowns permitted. A natural communicator, he liked to be able to talk with people face-to-face. Now he took leave. He escaped serious consequences, but “slept for three days”, he says.

COVID has had a much deeper effect on the organisation he has led for almost a decade. The Australian Taxation Office (ATO), already Australia’s largest creditor, saw the pandemic send its debt soaring.

Now the ATO wants to collect on those debts. Almost two-thirds of them are owed by small businesses. Chris Jordan has begun cranking up the ATO debt collection machine again.

The debt pandemic

The pandemic gave the ATO an opportunity to show it could move quickly when needed. The organisation delivered a way to make the federal government’s $100 billion in JobKeeper payments. Jordan sees that as a vindication of the ATO’s years of digitalisation work.

But COVID also forced the ATO to reduce its demands on taxpayers. The ATO’s debt book blew out: in three years from February 2019 to February 2022, it jumped by 75 per cent, Jordan says. The small business debt book blew out by an even higher 79 per cent.

Australia’s largest creditor intentionally became “very considerate and flexible”, he says. “Particularly with small businesses, we pretty much stopped debt collection, for example, unless there was … pretty egregious behaviour that grew significantly during that time.”

The ATO benchmarks itself against other tax agencies around the world, and it has been watching its debt level as a percent of revenue collected. Data from tax agents helped ensure the ATO had a clear picture of the hole that COVID was digging for it. And while the ATO’s debt ratio has risen, Jordan thinks its peak will end up “a bit lower than the UK, Canada and certainly the US”.

But Jordan sees reducing this debt and restoring ATO revenue as an important new task. Though the new Labor government will welcome the money, Jordan is under little political pressure from new treasurer Jim Chalmers (Chalmers appointed Jordan when he was Wayne Swan’s chief of staff). The ATO boss is now 68, his second term runs out in 2024, and he has previously said he won’t seek a third. But he still sees himself as having work to do.

Time to collect

And the payments are certainly coming in again — not just the new tax revenue, but repayments. “We’ve collected more debt in the last few months than we ever scheduled or forecast,” he says.

The ATO is of course encouraging taxpayers to get their money in as soon as possible, and it’s particularly keen to see outstanding superannuation guarantee payments made.

But beyond that, “We’ve looked at the larger debts, the longest outstanding debts, and we’re prioritising those,” Jordan says. Staff are writing to and phoning up taxpayers to remind them of their obligations.

The ATO has also picked up another debt collection tool: director penalty notices (DPNs). These make directors personally liable for pay-as-you-go and superannuation guarantee charge payments. “We’ve probably started to use director penalty notices more now than previously,” Jordan says.

“It’s either a third or two-thirds of debt notified under a DPN is paid pretty quickly,” he says. “It's been quite successful. But we’ve got a long way to go.

Small business battles

Jordan knows that in cranking up the ATO debt collection machine, he is triggering fresh criticism of his organisation. And he knows that much of that criticism is coming from the small business sector.

He tried early to head off such critics. When Public Accountant first interviewed him, back in 2013, he was at pains to explain how he had watched his son go through the usual struggles of starting a new business. He talked of his ambition to make dealing with the Tax Office just less painful, the way modern dentistry no longer evoked horror.

And he deliberately started his time in the job by taking on multinational tax evasion. In early 2015, when Apple, Google and Microsoft told a Senate inquiry they were not profit-shifting, Jordan pointedly returned to the committee to publicly question their claims. When an international agreement was made to crack down on multinationals’ “base erosion and profit-shifting” (BEPS), Australia was in the vanguard.

Over the years he has realised that the Tax Commissioner, as he put it in 2018, “is not going to be the most popular person or organisation in our society”. His primary role, after all, is to take people’s money. He knows it’s not a great basis for a relationship. But now he seems to accept that it won’t really change.

The agent relationship

Jordan’s relationship with tax agents has, perhaps inevitably, been among his least comfortable. Technology caused trouble from the early days: the ATO’s online tax agent portal stumbled soon after he arrived; the 2015 introduction of MyGov temporarily cut some tax agents out of the loop with their clients; 2016 and 2017 brought ATO portal hardware failures.

But many tax agents worry about a bigger technology issue. From day 1, Jordan’s vision for the ATO has included simplifying the tax task with technology – and that is taking some work away from tax agents, as ATO systems prefill more and more fields on returns. A report from the OECD lauds this strategy as lowering costs and allowing the ATO to leverage new data sources and improve payments. Jordan says prefilled data “will become more and more widespread”. The ATO has also pioneered data matching between returns and a variety of other sources, including social media.

It's hard to deny the logic of using technology to cut some of the costs out of tax transactions. “We can’t begrudge that move,” says the IPA’s general manager for technical policy, Tony Greco.

Jordan has promised tax agents that “you won’t be designed out of the tax system as technology progresses”. He still says that the number of individual Australians using tax agents is high by international standards, and that it might fall as work on the simplest returns is reduced. But a reduction in the numbers of tax agents themselves is not inevitable, he says. “We do not want to reduce the number of agents,” he tells Public Accountant. “We do not want to work against their interests. We want to co-design to make their life easier, to interact with us as seamlessly and quick as possible.”

Lower-value tax agents need to understand technology will force them to find higher-value work, he says. “You need to move up a notch, so that you've only got clients with a rental property or two, people that buy and sell shares, tradespeople that have depreciation of their tools and their ute et cetera. That's where ... you can add value. You can tell someone what their gain is on the shares they bought five years ago.”

Jordan tells the story of an agent he met recently who lives on the northern beaches of Sydney and loves surfing. “He said: 'I can work any time of the day or night, depending on what the surf's like.' He said: 'I will only take on clients who have the systems so I can look it at any time to work and extract the information or produce the values the tax return or accounts.' He said: 'I love it. This suits me.' I think more and more we're going to see that.”

Tax 3.0

In September Jordan unveiled the ATO’s latest blueprint for this technology-driven future. This blueprint is based on the OECD’s own plans for the future of tax, catchily dubbed “Tax Administration 3.0”. Jordan and the ATO played a substantial role in its development. One of its pillars is the use of taxpayers’ own software systems, with which government systems can connect.

This goes a step beyond processes like Australia’s Single Touch Payroll, where data gets reported as part of an employer’s normal pay processes. In Tax 3.0, reporting, payment and compliance checks all happen as soon as the taxable event enters the taxpayer’s software systems. 

Tax 3.0 is a logical extension of Jordan’s consistent desire to reap the benefits of automation. For instance, the ATO has led tax systems globally in releasing “application programming interfaces” (APIs), which essentially let software developers create these connections with ATO systems and exchange information. These connections can play a big role in Tax 3.0, and the ATO plans to use them more in the years ahead.

That’s one reason why Jordan has changed his tune on technology’s transformation of tax. Early in his time at the ATO, he talked as if the ATO would be the prime mover in this transformation. In a 2019 OECD paper, the ATO admitted it had had to abandon its old ‘build it and they will come’ stance. These days Jordan talks instead about the importance of co-designing digital experiences. “We're trying to help people, including agents, use their practice management software and have a seamless connection with us so that there's less double handling.”

Big versus small

A frequent and popular complaint about the ATO is that while it builds new systems to catch small business tax, it neglects tax avoidance and evasion by giant multinationals. In Jordan’s time in the job, the claim has appeared in everything from three-line tweets to ABC news analysis. Of all the charges made against his leadership, this one appears to rankle him the most. When he takes it on, he slows down his speech to accentuate each word or phrase.

“Some critics just wrongly claim that we unfairly treat small businesses, that we make up assessments of tax to them, that we add penalties, and that they have no right of appeal. You imagine a tax system with no right of appeal. It's bizarre. It's legally and factually just wrong.

“And what frustrates me is, I think it unnecessarily causes small businesses to be a bit scared or be uncertain or apprehensive. It's just not true that we could make up an assessment, put on whatever penalty we like, and they'd have no right to challenge that.”

For Jordan, the complaints of a big business bias are even more of a problem now than they used to be. In recent years the ATO has begun redirecting some of its focus away from very large businesses and toward small businesses. COVID interrupted that effort, but now it has begun again. The reason, Jordan says, is obvious in what is called “the tax gap” — the gap between what the ATO thinks is owed, and what it is actually collecting.

For large corporates – those with annual group turnover above $250 million — the ATO is collecting 96 per cent of what it is owed; the tax gap is four per cent. For individuals not in business, it’s collecting about 94 per cent, and the gap is six per cent. For small businesses — those with annual turnover below $10 million — the ATO says it is collecting just 87 per cent of what’s owed, and the tax gap is 13 per cent. In dollar terms, the large corporate tax gap is $5.5 billion while the small business tax gap is about $12.5 billion, Jordan says. All these figures are for 2018–19.

Jordan emphasises that “this is all independently calculated”, by economists on a panel using OECD-accepted methodologies. The ATO believes it has been open about these figures. “We as a country published more tax performance figures than any other country,” Jordan says.

The IPA’s Tony Greco agrees that the tax gap for multinationals is “quite small’ in comparison to the tax gaps for individuals and small businesses.

The attention on multinational companies (see breakout) “has not eased off,” Jordan says, “but … probably we need to move on”.

“Objectively if I look at where the best improvement in performance is going to occur, that's in the small business area.”

The 2022–23 hit list

The ATO has a long list of activities and industries that is will be scrutinising through the current tax season. It includes cryptocurrency transactions, hidden wages, and rental income.

Work-related expenses are a perennial ATO target, because so many people claim them. In the most recent year for which Jordan has figures, more than nine million individuals claimed more than $22 billion of work-related expenses. And they contribute $3.7 billion to the ATO’s net tax gap in Jordan’s most recent figures.

These expenses are also difficult to check. “We can never audit our way to success in that space,” Jordan says.

So the ATO has for several years been expanding a system of nudges, sending messages to people as the lodge their MyTax returns. The next step is to start nudging agents the same way as they prepare returns for clients. Jordan wants eventually to give this capability to software providers, “so that when you enter it in your accounting system, there's a nudge that comes up and says, ‘Oh, that doesn't look right, are you sure that's what you want to claim?’”

The ATO is also seeking to verify more of the $46 billion of rental property expenses claimed in relation to $46 billion in rental property income that are claimed each year. In random audits of rental income and deductions, the ATO found that nine out of 10 tax returns contained at least one error — even though most property owners have been assisted by a registered tax agent. “That was startling to us,” Jordan says. “Most of those were prepared by agents.”

The ATO responded by seeking out new data that it could match to returns. It’s now getting a stream of data from rental property agents for just that purpose. “Out of that $46 billion we can now assure around $31 billion of rental income … and $29 billion of the expenses.”

“So we've gone from nearly $100 billion of income and expenses that we had no idea about, to a high level of assurance now, over the income and expenses — through the ability to ingest data and to match it.”

Victory over multinationals?

Jordan is not yet ready to declare a complete win. But he seems genuinely buoyed by a string of legal settlements and wins that have recovered tax from large multinationals, and he believes many of these companies are changing their attitude to tax payments as a result.

Jordan seems to believe the ATO can have a new level of confidence that more appropriate tax payments will be made by Australia’s top 100 corporations — “not the overseas-owned digital companies, necessarily, but Australian-owned public company multinationals”. He reckons the ATO now has a good picture of this top 100’s tax affairs, simply because these companies are clear, discreet targets for tax enforcement. “If you take the top 100 companies in Australia, we have pretty well full-time staff embedded in those organisations. We know everything they do.”

He also seems buoyed by the late-July settlement with mining giant Rio Tinto over its Singapore “marketing hub”. That reaped the ATO an extra $613 million of tax over and above the $378 million already been paid to the ATO in amended assessments, plus interest and penalties.

He’s particularly eager to point out that the settlement also commits Rio to pay those taxes in the years ahead. “Everyone’s focused on the billion dollars. Well … it could be a lot more than that if you add in the next five years.”

Something similar has already happened at another old ATO sparring partner: US energy giant Chevron. After losing a court fight with the ATO in 2017, Chevron announced in September that it expected to pay $3.7 billion in total tax for 2022, including an ongoing $110 million a month in company tax. It had previously paid almost no taxes in seven years.

“I’ll tell you,” says Jordan, “A lot of losses they would have had weren’t there, because of the change in the case that they lost. And clearly, we’ve used that principle with other large energy producers in Australia — particularly in the gas area — because they have large capital expenditure.

“So we’ve brought forward the tax-paying position for energy companies in Australia significantly.”

Jordan also sees good results from the ATO’s “justified trust” program, where it seeks objective evidence that would convince a reasonable person that a particular taxpayer was paying the right amount of tax. “We've moved from six per cent of companies in 2019 having a high assurance rating to 51 per cent in 2022,” Jordan says. “That’s an outstanding result.”

Even those foreign-owned digital multinationals — Apple, Google, Microsoft and their ilk — are living in a slightly different tax world now. On top of the moves against base erosion and profit-shifting, a new global tax agreement may bring in new Pillar 1 and 2 tax rules that will raise taxes on many large multinationals and boost the integrity of the international tax system. And the ATO has had apparently solid local wins against foreign-owned companies such as Google, which in 2019 agreed to pay more than $480 million to settle a decade-long tax dispute.