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The Tax Practitioners Board - under new management

The Tax Practitioners Board — under new management

Chair Ian Klug AM

Keynote speech to the Tax Institute  Tasmanian State Convention, 17 October 2019

Introduction

Thank you, Matthew [Pawson, Convention Chair], for your introduction, and inviting me to speak today at your Tasmanian State Convention. 

I am delighted to be the first speaker at this event put on by the Tax Institute for the tax practitioner profession — I am sure it will be a successful and rewarding convention for all involved.

But really, I’m just the warm up act for my colleague from the ATO, Second Commissioner Andrew Mills who will be speaking next. 

Ladies and gentlemen, I’m very proud to serve as the Chair of the TPB.

On the Board I sit with seven highly skilled Board members; a group of professionals who have extensive experience in the fields of accountancy, tax, law and financial planning.

Our combined experience gives me some confidence in saying we have a modest understanding of the world of the tax practitioner.

At the TPB I work with around 130 dedicated staff, who support tax practitioners and members of the public in roles ranging from registration services, compliance investigators, legal officers, policy and IT experts, and corporate services support.

It is my privilege to work in a position where I can serve the public in such an important way, building on my many years of experience as a tax practitioner myself.

As you can see behind me, the theme of my talk today is ‘The TPB — under new management’.

Since taking up the role of Chair at the beginning of this year, and in working closely with my fellow Board members and our excellent new CEO, Michael O’Neill, the TPB has gone through some significant changes.

We’ve got a new strategic direction, a renewed energy and a common goal to work towards — which is protecting consumers and ethical practitioners by strengthening the TPB as an efficient and effective regulator.

To set the scene, let me explain how we’ve evolved. 

The TPB was established back in 2010, taking over from the state based Tax Agents’ Boards.

In our initial years of operation, we worked hard to ensure that those who were new to the regulated tax profession, such as BAS agents, quantity surveyors and research and development consultants had the correct experience and qualifications to be registered to provide tax services and understood the professional and ethical standards they were required to abide by.

Once this work all settled into place and became business as usual, in 2014, the TPB underwent the same process to bring on board nearly 20,000 tax (financial) advisers.

We are now responsible for the regulation of around 80,000 registered tax practitioners. 

Having now bedded down those processes, we have recently made a strategic shift in direction.

Although registration of tax practitioners will always be a central function of the TPB, our attention and focus is moving more into the regulatory space.

While many practitioners, no doubt including all in this room, provide excellent service to their clients, we now need to focus our strategies on those who do not.

Millions of Australians are clients of tax practitioners, and we are working to support the public by regulating practitioners to ensure they are providing services competently and with honesty and integrity.

We are aiming to level the playing field for honest and ethical tax practitioners, and want to see Australians benefit from better public services, a stronger economy and a better business environment.

You will see our refreshed strategies reflected in our recently released 2019–20 Corporate Plan, available on our website.

So today, I want to talk to you all about the changes that have occurred, and will be occurring, under our new management.

I’ll take you through some of the challenges many of us face in this fast-paced environment, particularly in the tax and finance sectors.

I’ll also talk about the independent review of the TPB and the Tax Agent Services Act or the TASA, which kicked off earlier this year and is now in its final stages.

Moving on from the review, we’ll look at the opportunities it has presented in relation to law reform.

Finally, I want to talk to you about the compliance approach we’ve had in place for the last year, what we’ve learned, and how we see this work moving forward.


A changing environment

Now, let’s consider the environment in which we’re all working right now. 

Recently, the Australian Public Service Commissioner, Peter Woolcott, noted, and I quote:

'As we grapple with these changes to society, the public service must also tackle increasingly interconnected, complex policy problems … digital transformation … rigorous evaluation of policies … security and privacy concerns, and a renewed focus on person centred service delivery.’

While his comments are aimed at the Australian public service, I think they are common issues that the TPB as well as you and your clients are facing.

In addition, there are other key issues impacting directly on the TPB, and as a result on tax practitioners:

  1. The tax gaps identified by the ATO, and what this means for all of us
  2. The review of the TPB
  3. The recommendations arising from the Hayne Banking Royal Commission


Tax gaps

Tax gaps are a relatively new concept that I’m sure most of you have heard about.

Essentially, they are an estimate of the difference between the amount of tax the ATO has collected, versus what they would have collected if every taxpayer was fully compliant with tax law.

The ATO has done significant research in this area and the 2014–15 ‘individuals not in business’ tax gap estimate alone is calculated to represent lost revenue totalling $8.7 billion.

In relation to small business, the ATO estimates the 2015–16 tax gap for the small business sector to be approximately $11.1 billion. Over $7 billion, or over 64% of the total value of this tax gap, has been attributed to black economy behaviour.

The research also identifies the role tax practitioners have played in contributing to the tax gap, keeping in mind that 70 per cent of individuals and 90 per cent of businesses engage a tax professional to manage their tax affairs.

To demonstrate the relativities around the tax gap, just try and wrap your minds around some of these numbers.

If we assume the $8.7 billion ‘individuals not in business’ figure was actually collected, we would have seen:

  • a significant reduction in the Federal budget deficit
  • a significant increase in the budget surplus; or even
  • from a budget deficit to a surplus.

Let me breakdown that further:

  • in the 2017–18 year, the Federal budget deficit was $10.1 billion
    • if the individual not-in-business tax gap had been ‘closed’, the Federal budget deficit would have fallen to $1.4 billion.
  • in the 2018–19 year, the already very modest Federal budget deficit was $0.7 billion
    • if the individual not-in-business tax gap had been ‘closed’, the Federal budget would have been in surplus by $8 billion.

The point of this is that reducing the tax gap makes a difference on a macroeconomic scale, by eradicating the deficit and increasing the budget surplus.

And bear in mind that this analysis is focused on just one tax gap estimate, just for individuals not-in-business.

Tax gap reduction is not just the job of the ATO.There’s a role for every Australian, and especially for tax practitioners and the TPB. So I want to discuss today the TPB’s response to this challenge.

Two key components driving the gap are first, the black economy of omitted income, and second, incorrect claims for deductions for work-related expenses.


Black economy

The Black Economy Taskforce report identified the role of tax practitioners in aiding and promoting the black economy and illegal activities.

They have noted the need for more visible action taken against egregious tax practitioners, which has been supported by the Government with dedicated funding given to the ATO and TPB to combat the black economy.

At the TPB, we are coordinating initiatives to mitigate, disrupt, contain and treat tax mischief.

One of the strategies we’re using in our compliance approach to combat the black economy is stronger collaboration with other co-regulators, such as the ATO.

The ATO has classified groups considered ‘agents of concern’ and ‘agents of threat’. Behaviours of these agents are unacceptable and attract very highest intensity approaches.

We are working alongside the ATO in their strategies to target these practitioners.

The ATO brings these agents to account, and the TPB removes them from the system.

We also liaise with taskforce participants to ensure actions are coordinated across Government, particularly for non-tax related black economy behaviour.

Another approach is using data to look closely at black economy indicators. 

This includes:

  • practitioners who have a high number of clients associated with the cash economy
  • asset indicators for practitioners and/or clients significantly in excess of income levels; and
  • a high proportion of clients entering debt agreements, insolvency, administration and liquidation.

For example, right now we are looking at a case involving a company tax practitioner who assisted clients in setting up labour hire entities with straw directors.

The behaviour we are seeing from this practitioner that resulted in the investigation included:

  • lodging BAS, claiming input tax credits where they have failed to remit GST
  • failing to remit Pay As You Go and super guarantee amounts on behalf of employees
  • the company practitioner acting as tax agent, ASIC agent and payroll services provider.

During our enquiries, the practitioner entered into voluntary liquidation in lieu of transfer of assets and business to new entities (‘phoenix’ behaviour).

The principals of the company lodged new applications for registration for new companies associated with them or their employees.

So we’re working closely with the ATO regarding related entities and behaviour to progress this case.


Work-related expenses

As mentioned, the other key component driving the tax gap is incorrect work-related expense claims.

Earlier this year, ATO Commissioner Chris Jordan addressed your national convention in Hobart.

He noted that in the individuals market, a lot of people are getting things a little bit wrong, however the cumulative effect is great.

Tax practitioners who are involved in the black economy and related activities such as phoenixing are clearly at the more extreme end of the misconduct scale.

So while you could feel your practice is removed from the high stakes of the black economy, work-related expenses may bring the issue of misconduct a little closer to home.

A recent OECD report stated that the financial sector had undermined community trust.

We see this reflected in the tax gap work done by the ATO, and its links to practitioner prepared returns.

The ATO research reveals that incorrect claims made by tax practitioners are higher than those of self-preparers; 78% for tax agents, and 57% for self-preparers.

The very people given the position of trust in the system are those abusing it; deliberately or otherwise.

At the TPB, we are working to deal with tax practitioners who don’t appropriately undertake this role, or who are flaunting the rules and the system.

In working with the ATO in addressing the issue of incorrect work-related expense claims, we can use data analytics to identify systemic and ongoing claims of this kind.

Incorrectly claiming work-related expenses may seem a low-risk activity, however registered tax practitioners risk their registration status by pushing the boundaries of appropriate claims.

Applying taxation laws correctly and being a competent tax practitioner are two items tax practitioners must adhere to under the TPB’s Code of Professional Conduct.

Not meeting these obligations can result in sanctions, which include termination of registration.

We recently had a case where the registration of a tax agent in Wollongong was terminated for overclaiming expenses on behalf of his clients.

The ATO identified the practitioner’s behaviour through their compliance activities and referred the matter to the TPB for further action.

The behaviours that concerned the TPB included:

  • advice to clients to claim family pets as guard dogs
  • claiming household food purchases as staff and client amenities; and
  • claiming personal training and school fees as training and conference expenses.

Not surprisingly, the former tax agent’s conduct did not accord with the TPB's view of what constitutes a fit and proper person, and therefore the decision was made to terminate his registration.

The work being undertaken to address these incorrect claims is starting to have an effect and the gap is starting to close.

Over the past two years, the average work-related claim has decreased and the estimated revenue gain is around $560 million.

Let’s imagine for a moment an even better tax environment if we addressed tax gaps in Australia.

Reducing the tax gap not only delivers a stronger fiscal policy, it enhances the government’s capacity to improve services for all Australians, build infrastructure and something we would all like to see… which is lower taxes for all Australians.


Independent TPB review

So, let me move on from the tax gap…

Almost 10 years after the TPB commenced operations, there is currently an independent review of the TPB and the accompanying legislative framework underway.

The review is being led by Keith James and supported by Neil Earle.

Keith was for many years Deputy Chair of the Board of Taxation and Neil was a former president of the Tax Institute.

Both are highly skilled and bring an immense wealth of experience as practitioners themselves.

As part of this review I have personally met with Keith and Neil on many occasions, along with the Assistant Treasurer, the Treasury Secretary, Head of Revenue at Treasury, the ATO Executive and the Commissioner himself.

The review is taking a good hard look at the TPB.

I have no doubt the outcome of the review will challenge us to improve, including addressing perceptions of the TPB’s independence from the ATO, whilst at the same time ensuring closer collaboration.

The review is also considering the operation of the Tax Agent Services Act 2009 (TASA), how it’s operated so far, and whether the law is fit for purpose.

This process represents a significant opportunity for all of us to have a say in the regulation of tax practitioners.

In our submissions to the review, we focused on making it easier for practitioners to comply and are seeking greater powers for the TPB to manage misconduct, ultimately ensuring a level playing field for all tax practitioners.

This has been a journey for the Board, our people and broader stakeholders, including tax practitioners, professional associations and other government agencies, to facilitate the TPB being able to do a better job.

The review process has involved extensive consultation, initially when the review commenced in March, and then a second round of consultation following the release of a discussion paper in August.

I’m grateful to the Tax Institute and other associations and various stakeholders for over 60 written submissions and robust round table consultations, all contributing to ensure we achieve the best public policy outcome.

I look forward to the final report, which is due to Government on 31 October.

But right now, I can give you some indication of the key issues raised in Keith James’ Discussion Paper.

Subject to consideration and decisions by Government, and confirmation by Parliament, our goal is to ensure our services and the regulation of tax practitioners is world class.

One area the review is looking at is easing regulatory burden.

The TPB’s view echoes the Australian Government’s commitment to improving the quality of regulation, including minimising the regulatory burden on businesses, community organisations and individuals.

A key way to ease the regulatory burden is strengthening and improving whole-of-government relationships, and of special relevance to us, the relationship between the ATO and TPB.

I have mentioned several times today how our two agencies work together to tackle compliance.

However, there are naturally hurdles to overcome in information sharing, due to privacy, technology and a need-to-know approach.

The TPB review supports a recommendation from the Hayne Royal Commission that information sharing between agencies should be formalised through legislation to make it mandatory rather than discretionary.

The review also notes that the abundance of regulatory bodies places a huge and unnecessary regulatory and compliance burden on practitioners, and multiple points of entry for consumers of tax services.

Again, borrowing from Hayne’s recommendations, the review suggests looking to the Government’s new Modernising Business Registers program of work as an avenue to cut red tape.

This would benefit consumers by providing a ‘one-stop-shop’ of professional registers, and ease the burden in maintaining separate registers.

To ensure that consumers are better informed and there is a ‘level playing field’ of all tax practitioners, the review also suggests the TPB Register should be expanded.

This includes further detail about tax practitioners, such as detailed reasons of any sanctions or terminations, reasons for rejections of renewal, and a list of known unregistered providers.

We agree whole-heartedly with these suggestions.

The TPB Register is the key tool for consumers to assure themselves their practitioner is not only registered, but operates according to appropriate ethical and professional standards.

The review is also looking at the TPB’s investigative and sanction powers, which is largely where our interest lies.

This aligns to our new strategic direction of strengthening our role as a regulator, and is necessary to allow timely, efficient and effective action to be taken on misconduct.
We also support the review’s proposal to see a broader range of sanctions available, including:

  • infringement notices
  • enforceable undertakings
  • interim and immediate suspensions, and
  • lifetime bans.

The ATO is also supportive of a broader range of sanctions to be afforded to the TPB as an outcome of the TPB review.

These extended powers will enable the TPB to take more effective action on breaches of the Code of Professional Conduct, and increase the number of cases we can undertake.

Once the final report from the TPB review is delivered to Government and Government has released its response, the TPB will work to develop what’s called a New Policy Proposal, or NPP, as part of the Budget process.

The NPP will ultimately be presented to Cabinet for final decisions about law, policy and resources.

The TPB will also work closely with our stakeholders to ensure any law changes are implemented appropriately.

We see that some issues raised by Keith James are closely linked to other Government priorities, not just financial advice reforms, but initiatives to deal with the Black Economy.
We are hopeful this might expedite timeframes for any necessary legislative reforms.


Hayne Royal Commission

This now brings us to the final issue I mentioned that is impacting on the operations of the TPB.

This is the outcome from the Royal Commission into Misconduct in Banking and Financial Services.

As you know, the Royal Commission and its final report released by Kenneth Hayne caused huge waves in the financial industry, and with consumers and the public at large.

It has definitely caught my interest, both personally and as the Chair of the TPB.

As an example, I’ve been reading a book recently, written by journalist Daniel Ziffer, on the Hayne Royal Commission, entitled ‘A Wunch of Bankers’.

Ziffer spent a year covering the commission for the ABC and his book is a truly gripping account of the failures of the financial system.

The Government is taking the outcomes from the Royal Commission very seriously and is committed to delivering long lasting change to the financial sector to ensure public confidence is restored.

In early August the Treasurer announced the Government’s implementation roadmap which sets out how it will deliver on its comprehensive response to the Royal Commission.

The law changes required to bring about the recommendations will occupy 75 per cent of the Treasury’s upcoming work program, and the Treasury’s legislative program typically represents roughly 25 per cent of the total government program.

The role of regulators such as ASIC and APRA was specifically called out in Hayne’s report, as he noted:

‘…too little attention has been given in Australia to regulatory, compliance and conduct risks’.

Other reviews such as the Black Economy Taskforce and the IGT’s Future of the Tax Profession — have also highlighted the need for prompt and well-coordinated action by all within the tax system to manage the challenges and opportunities ahead.

This environment of scrutiny on regulators and the attention on misconduct has made us sit up and take notice at the TPB.

We need to be mindful of the intense public examination this sector is subject to now.

As mentioned, since we were established nearly 10 years ago from the state Tax Agents’ Boards, we’ve been largely focused on getting Australia’s tax practitioners registered and accounted for.

However, while we have been doing this, issues of misconduct in the financial services sector, and indeed in the tax profession, have been creeping up.

We’ve seen what is happening out there, looked to our own effectiveness and we are taking action.

The TPB’s core role is to ensure tax practitioner services are provided to the public in accordance with appropriate standards of professional and ethical conduct.

We aim to be an effective regulator that supports consumers. 

To better protect the community, and ensure practitioners are acting with appropriate professionalism and conduct, we’ve invested in new technology, have deployed new strategies and are working on developing our capability.

Now, although there are many environmental factors at play, the TPB has not been resting on its laurels. Let me now take you through how we’ve refreshed our compliance approach.


Our compliance approach

We are working closely with the ATO to support honest practitioners by applying closer scrutiny to those highest risk advisers.

You’re probably aware of the ATO’s Practitioner Engagement model which is shaped like a tear drop.

At the bottom end is the base of honest practitioners who comply with their obligations and do the right thing.

At the pointy end are those advisers involved in tax crime, evasion or avoidance.

And in the middle is a graduated mix of practitioners who display low to high risk behaviours. The TPB is adopting the teardrop model to enhance whole-of-government collaboration.

In addition to adopting the teardrop model, we have recognised that tactical change is required to enable our program of work to achieve greater recognition — and to ensure that we are better aligned with our strategic objectives.

Our renewed approach to practitioner compliance looks to better utilising data, rationalising our compliance treatments, targeting unregistered providers, and collaborating with co- regulators.

Data driven risk profiling essentially means we are using data analytics to target the pointy end of the tear drop model.

We have reset our investigations and enforcement strategy to focus on some 2,000 of these highest risk practitioners, which includes unregistered advisers as well.

This is only around 2.5 per cent of the overall tax practitioner population, but a group that has significant leverage, often as the drivers or initiators of illegal tax schemes.

We’ve looked at 1,600 highest risk tax practitioners, and their reach into the community.

These highest risk practitioners and unregistered agents have significant, and are linked to around 4,600 controlled entities and 2.9 million associated clients.

Looking at one indicator of risk in these 2.9 million clients shows alarmingly high work-related expenses.

Early analysis in the 2018 year suggests this overclaim will be higher than $1 billion.

Internally, we have rationalised compliance treatments and streamlined case management procedures to enable us to process cases more efficiently and effectively.

We hope to see changes to our sanctions and investigations powers to further assist in this regard.

We’ve strengthened our approach to collaborating with co-regulators, and we are proactively sharing information with other agencies to target the practitioners who pose the highest risk.

An example of our new strategy is the recent tax practitioner’s PTO or personal tax obligations project we ran in collaboration with the ATO.

This project saw us write to a combined population of over 6,000 registered agents and entities with outstanding tax lodgements and debt.

These practitioners were targeted with messaging about their outstanding personal tax obligations (which is a breach under the TPB’s Code), and the possible ramifications of not correcting them — namely, sanctions up to and including termination of registration.

Launched late last year, the project saw in a space of only six weeks - as a result of one letter some 2,000 agents voluntarily paid almost $40 million in tax debt and updated around 6,000 lodgements.

So… we are already seeing outcomes from our new compliance approach; in 2018–19 we applied 749 sanctions against rogue tax advisers, a 200 per cent increase over 2017–18.

We expect to see this trend continue upwards into the future.


Looking ahead

Looking to the future, we anticipate a renewal of the TPB following the release of the independent review, and are prepared to meet the challenges of the evolving changes of the tax profession, and community expectations.

We will continue to work closely with other regulators and stakeholders such as The Tax Institute, and other professional associations, to be an effective and efficient regulator of tax practitioners.

We are equipping our workforce to be agile and prepared to embrace the TPB’s future environment.

With so much change underway the TPB is excited about the opportunities to better serve Australians in the future.

In concluding, can I thank the Tax Institute for the opportunity to speak to you at a pivotal moment in time for the TPB… which sees a Treasury legislative agenda that will be dominated by implementing recommendations of the Hayne Royal Commission… new management and a fresh agenda at the TPB… and the imminent release of the Keith James review.

Thank you.


Last modified: 17 October 2019