Kirsten Fish, Second Commissioner, Law Design and Practice
Keynote delivered to Australian Financial Review CFO Live
19 November 2024
(Check against delivery)
Introduction
Good afternoon and thank you for the kind introduction and welcoming me to my first CFO Live event.
I too would like to acknowledge the traditional owners of the lands that we meet on today, and pay my respects to Elders, past, present and emerging.
For the past few years my colleague Second Commissioner Jeremy Hirschhorn has delivered the annual ATO update at this event. Today, I will build on our previous messages, and bring a slightly different perspective as Second Commissioner for Law.
Since the last CFO Live forum, the ATO itself has entered the next phase of our evolution with the commencement of Commissioner Rob Heferen.
Over the past 8 months, Rob has consulted widely, and has spoken publicly about his observations since becoming Commissioner and the core foundations for how the ATO will operate during his tenure:
- recognition of our role as the nation's principal tax collector, collecting the right amount of tax under the law for the least cost to the Government and the taxpayer, and
- ensuring integrity in everything we do, acting fairly and demonstrating compassion, noting the various factors that influence voluntary compliance including perceptions of fairness and institutional trust.
While these are constants, we recognise that the environment we all operate in is uncertain. The pace of change in technology, consumer expectations, and regulatory complexity is no doubt on the minds of all CFOs in the room. The risks you are managing are more diverse, and their management more complex.
Today I will focus on the benefits of tax certainty through 3 lenses:
- managing the certainty/cost trade-off
- achieving certainty in disputes, and
- gaining certainty through transparency and building trust.
Why focus on corporate tax
But first to recap on why we have such a dedicated and continual focus on corporate tax.
Australia's corporate income tax take is about 22% of total Government revenue, more than double the OECD average of 10%. Our recently released 2023–24 annual report shows net tax collections for last year were over $610 billion. Company tax collections represented about $140 billion of that.
Those collections are concentrated in a relatively small population of large corporate entities. The largest 10 corporate groups pay around 30% of all corporate income tax and the largest 100 pay around 55%.
We recently released the tenth annual Corporate tax transparency report . It showed that for the previous year, 2022–23, close to $100 billion, $98 billion at lodgment, in income tax was paid by Australia's largest corporates. And over the last 10 years, large corporates have paid more than half a trillion dollars in tax, and that is before ATO compliance actions.
The expectations on the ATO as administrator and on large businesses are rightly significant.
The ATO has confidence that most large businesses continue to meet their tax obligations. Pleasingly, voluntary compliance in the large market segment has shown positive improvement over the past decade and today, large corporates are one of the most compliant of all market segments.
Nonetheless, risks and tax gaps remain. The tax gap for large businesses for 2021–22 is estimated to be at over $3.6 billion, or 4.1%.
That is why the work of the Tax Avoidance Taskforce is so important to influence and improve the tax compliance of large businesses, and why sustaining multinational and large taxpayer performance features as one of 6 key focus areas in the ATO's corporate plan for 24–25 .
Tax certainty versus costs of compliance: a trade-off
Our focus remains on supporting large corporates to sustainably reduce this gap.
I can assure you that the ATO is conscious of the cost of compliance for all taxpayers. We understand that appropriate risk management, governance and controls require funding that may be contestable within an organisation. We understand that implementing changes can be costly.
But we also consider that having robust, lived corporate governance on tax issues, and managing tax risk, is essential.
Over many years, the ATO has invested heavily in developing tools, programs and offerings that you can leverage to understand your tax risk profile and obtain certainty.
Advice and guidance
We continue to provide 1:1 advice and guidance, offering large corporates the opportunity to engage with us before a transaction to obtain certainty. These channels provide the highest level of certainty to taxpayers in that it is legally binding on the ATO.
Early engagement on complex transactions ensures there is a clear understanding of the proposed scheme and the tax implications before a formal ruling application is made.
When providing certainty to taxpayers on a specific area of their business we will look to review their tax outcomes holistically, for example by understanding their entire global supply chain rather than looking at issues individually. This ensures the ATO is able to stand by the advice as we have fully understood all aspects of the arrangement.
Through our public rulings program we provide certainty on how the law is interpreted, and where we see risks or transactions that will attract our attention. For example, our practical compliance guidelines allow taxpayers to make informed decisions about their compliance risks, enabling a conscious choice to take low or no risk tax positions to avoid 'surprise' disputes.
For arrangements we have concerns with, we will publish a taxpayer alert, so other large corporate groups don't unwittingly enter the arrangement.
And we continue to work to provide certainty on the practical application of new laws as they are enacted, to ensure affected taxpayers understand their obligations. In implementing new measures we are always bound by the law and must give effect to the intent of parliament and the underlying policy. However, we will be pragmatic and understanding of the practical implications for taxpayers.
It is in both the ATO's interest, as well as yours, for the ATO to provide certainty through helpful guidance, fully informed by commercial reality, as early as possible. Your early and open engagement is critical to us being able to provide this certainty for you.
Justified trust
For CFOs, the justified trust report and assurance rating is the simplest way to understand your entity's tax risk profile and, through our findings report , how your organisation compares to its peers.
We have dedicated teams that continually work with Australia's largest businesses in our Top 100 program to monitor and assure their tax affairs. Our latest findings report revealed 59% have achieved a high overall assurance rating, up from 52% in 2023, and a further 23% a medium overall assurance rating, which is encouraging.
Over time, we've seen a reduction in high-risk transactions being entered into. This reflects the efforts of taxpayers and the ATO to get tax outcomes right on lodgment, avoiding costly disputes.
To ensure our engagement is tailored and timely we've made some enhancements to our top 100 justified trust programs. We're refocussing our efforts to move our engagements with large business to 'real time', engaging with businesses as close to the time of the transaction or event as possible.
Engaging in 'real time' is expected to provide greater certainty in relation to significant events and transactions including where we do or don't have concerns. This will ensure we are focussing on only the most important matters after lodgment of the return.
Some corporates are already engaging with our teams in this way with great benefit. For example, in one case we were able to provide a letter to the Board outlining the ATO views, allowing the Board to move forward to publicly announce the transaction worth billions.
We are well advanced in putting in place disclosure frameworks with businesses in this program. I encourage you to read our new guidance about our expectations of taxpayers around this.
We understand this may require changed processes for many businesses, but we believe the anticipated reduction in cost of compliance along with an increase in certainty, will make this worthwhile.
For these benefits to be fully realised, businesses need to lean in and engage in the processes fully, openly and transparently.
We have also reshaped our program for taxpayers in the Top 1,000 program . We aim to review these taxpayers once every 4 years. With over one third of the population having had 2 reviews, our observation is that once a business demonstrates high levels of tax compliance, it is likely that this will be maintained. This 'stickiness' give us confidence to better tailor the program building on assurance ratings achieved to date.
We've done 2 key things:
- Differentiated the population to create a new tier of taxpayers called significant taxpayers, typically, businesses with turnover of greater than $1 billion. Creating a new sub-segment allows us to start thinking about what other services can and should be provided.
- Tailoring our engagements having regard to assurance achieved to date. This means that taxpayers that have achieved high assurance previously, will typically see less intensive and less costly reviews.
These increasing levels of compliance and streamlining of processes mean that taxpayers that have demonstrated high levels of assurance should see the ongoing costs of certainty through justified trust fall.
Reshaping our programs in this way also means that we're able to continue to bolster our investment and efforts in tackling those arrangements that require greater scrutiny. This means that there really is nowhere to hide.
The move to 'real time' is not a replacement for effective tax functions or tax advisors. Investment in internal tax capacity and capability, and engagement of external tax advisers, will continue to be necessary to manage tax risks.
The public reporting and parliamentary committee inquiries following findings relating to conduct of some partners at PwC demonstrate that behaviours that seek to game the tax system are not tolerated by the community and indeed the ATO.
I encourage you to hold your advisors accountable not only to meeting their legal obligations, but to also demonstrate professional and ethical behaviour of the highest standard.
I also encourage you to test the tax advice you are provided to be confident that it considers not just the legal risks, but also the possibility that the ATO may have a different interpretation and the practical implications of such a scenario.
Achieving certainty in disputes
While our focus is on increasing voluntary compliance, and obtaining assurance that the right amount of tax is paid, it is a reality that not all taxpayers achieve certainty across all matters, and that there will be issues we disagree on. Disputes are a feature of a complex tax system, aspects of which are open to interpretation.
During 2023–24, 24 matters involving public and multinational businesses were escalated and endorsed for audit, where global profit shifting risks continue to be a major focus. Around 65–70% of current income tax audits in this market involve global profit shifting issues, including transfer (mis) pricing, mischaracterisation of business activities and capital flows, and withholding tax avoidance issues.
Common dealings under audit include related party finance, intangible migration, embedded royalties, inbound distributor arrangements and disposal of assets by foreign investors. And we continue to investigate arrangements where tax avoidance is a concern. The application of the general anti-avoidance provisions, including diverted profits tax, is being considered in approximately 30% of current income tax audits in the public and multinational market.
Where a dispute arises, we seek to resolve the dispute as early as possible. This includes providing opportunity for independent review prior to amending an assessment, and engaging in alternative dispute resolution and negotiated outcomes where appropriate. I encourage you to read my 2023 speech to the International Tax Administration Conference to understand our holistic approach.
For a small portion of our disputes, certainty will come through litigation. Litigation is a valid resolution strategy for cases where it is important for the community to see us take action – for example in cases of fraud or evasion. It is also essential to create precedent, to shape the system and provide clarity for all taxpayers in a transparent way.
While litigation of large market disputes is often expensive and lengthy, to address important, systemic issues, issues with the potential to proliferate, or issues causing uncertainty in the tax system's interpretation or operation, we are prepared to litigate.
In recent years, we have pursued important international tax issues in court. These have included related party financing, marketing hubs and embedded royalties, and tested new provisions including the diverted profits tax. While we don't succeed in every matter, the courts have provided important judicial precedent, benefiting all taxpayers, the ATO and the tax system.
Settlements are an appropriate and necessary feature of a well-functioning tax system, providing overall fairness where there are disputes, ensuring the most appropriate matters are pursued in court.
I want to make it clear we do not settle disputes at any cost.
We only settle disputes when it is appropriate to do so. We are guided by the ATO's Code of settlement and our obligations under the Legal Services Directions , including the obligation to act as a 'model litigant'. Our settlements must be made on a principled basis.
When deciding whether to settle, we weigh up the strength of each party's case and litigation prospects, the cost of the dispute continuing, and the impact on compliance for the taxpayer and the broader Australian community.
Settlement can occur at any stage, including before an audit commences, during an audit, objection or litigation. However, we will not settle a case until we have sufficient information to understand the facts and issues. We may engage experts and senior legal counsel to assist in determining the prospects of success and whether and what settlement is appropriate.
Our approach to settlements also secures future year compliance, locking in future revenue over and above the settlement figures reported, providing certainty of position, and freeing up resources for the ATO and for the taxpayer. More than 75% of all public and multinational business settlements in 2023–24 included future-year obligations. This means that more tax will be paid by these entities in the future at lodgment, without the need for any costly disputes.
While the ATO's legal obligations prevent the ATO from sharing the specifics of any particular settlement, businesses themselves are able to disclose that they have entered into a settlement with the ATO. We encourage businesses to do this.
We are able to, and do, seek to give the community confidence in our settlement practice through our transparent reporting and our assurance activities.
In 23–24 we entered into 301 settlements, including settlements with 67 public and multinational businesses that secured $1.8 billion in tax.
Under the ATO's Independent Assurance of Settlements (IAS) Program, 5 former Federal Court judges review our largest and most significant settlements. In 2023–24, all 16 settlements reviewed under the IAS program, 13 of which involved public and multinational businesses, were found to produce a fair and reasonable outcome for the Australian community.
The community can also take confidence from ANAO findings that our settlement practices are effective, and in line with our policies and procedures.
Details about all of our settlements appear in our annual report, including numbers by market, stage of settlement, the variance between the ATO position and the settled outcome, as well as the outcomes of our IAS program reviews. We have further increased our reporting and transparency in respect of large market settlements by publishing our settlements insights report , which I encourage you to read.
Gaining certainty through transparency and building trust
The ATO has a long history of providing transparency about the operation of the tax system. We've been publishing statistics about taxation for over 110 years now. Since 1959–60, we have continued to publish Taxation statistics as a separate report annually, expanded the reporting in our annual report, and published a range of mandatory and voluntary reports and publications.
We also administer the centralised hosting of published reports for signatories that have adopted the Voluntary Tax Transparency Code .
Through our transparency, the community can have certainty that public and multinational businesses are paying the right amount of tax. This has the effect of boosting the integrity of and confidence in our tax system across the board, which benefits all Australians.
ATO transparency has benefits for large business too. Some stakeholders have called out the value in having positive affirmation from the ATO that their tax outcomes are correct. These assessments allow CFOs to have influential conversations with their board and the weight of this affirmation can assist in demonstrating the organisation's social license.
Our findings reports also allow businesses to calibrate their tax risk posture – by comparing their own outcomes with those of their peers.
However, ATO transparency can only go so far. Much benefit and certainty can be gained through greater voluntary transparency by taxpayers themselves.
A number of significant Australian businesses including Woodside, BHP and Rio Tinto have led the way, embracing voluntary transparency and investing in disclosures over and above agreed requirements. Those businesses should be commended for their holistic approach to explaining their tax position in context.
To the CFOs of large businesses that have not yet chosen to do this, I would say that there is an opportunity for you, individually and collectively, to increase the level of trust that the Australian people have in the large corporate market and their understanding of, and confidence in, the contribution you make to Australian society.
In uncertain economic times large corporates will likely continue to come under scrutiny and face increasing demands for accountability. As Australia faces into short- and longer-term challenges, having a well-informed community and Government will be essential in supporting good policy making. It really is up to you to drive that level of transparency forward.
Conclusion
Tax plays a critical role in a well-functioning society. Consistent, meaningful, and timely transparency is key to driving improvements in tax performance. It underpins the integrity of the Australian tax system and importantly provides the community with confidence that large businesses are paying the right amount of tax at the right time.
The ATO is committed to work with all taxpayers with integrity, fairness and compassion. Our relationship with the community is based on mutual trust and respect. We are committed to being fair, ethical and accountable in everything we do, which I hope is a commitment you all have as CFOs in your roles too.
Thank you for having me here today.
Information for journalists
- A headshot of ATO Second Commissioner Kirsten Fish is available for download.
