Tax Policy & Controversy Briefing | January 2014
An interview with Chris Jordan - Commissioner, Australian Taxation Office
Chris Jordan, AO1, was appointed as Australia's Commissioner of Taxation on 1 January 2013. He has broad and lengthy experience in tax policy and law development and implementation, having held influential roles in the private sector and as a government advisor to both Labor and Coalition governments. He was the Chair of the Board of Taxation from June 2011 to December 2012 and a member of the Board from its inception in 2000. He also served as Chair of the Business Tax Working Group from 2011 and as Chair of the New Tax System Advisory Board from 1999 to 2001 and was a member of the group that consulted with the mining industry on the resource rent tax from 2011 to 2012.
Chris has 30 years of experience in the tax profession: he started his accounting career with Arthur Andersen in 1979 and spent several years as a senior lecturer in taxation at Sydney’s University of Technology before working for KPMG for more than two decades. From 1995 to 2000, Chris was Partner in Charge of the New South Wales Tax and Legal Division of KPMG and from 2001 to 2012, Chairman of Partners for KPMG New South Wales.
Chris spoke with Alf Capito, EY’s Asia Pacific and Australia Tax Policy Leader at EY's Asia Pacific Tax Symposium in Singapore on12 November.
Alf Capito: Chris, you've been in the Commissioner’s role for just under a year now but of course you've spent many years in the profession. What were your first impressions of the role?
Chris Jordan: The Australian Tax Office is such a vast organization: 25,000 people over 60 sites, a A$3.5b budget, and I suppose I'm still coming to grips with what it actually does. There are so many facets to it: it's not just your large business compliance area that maybe you and I have more traditionally interacted with. It really is quite enormous. It constitutes about 15% of the Australian public service. What I've realized, though, is that it's very good at implementing major new policy initiatives and it's got a great end-to‑end design process. It's a leader in design in government, but there are areas that could be improved. I'm focusing on a longer-term vision: improving customer service and focusing on some significant cultural shifts within the organization.
Alf Capito: How did you find the culture? I would have thought that someone who's come in from the outside might be at risk of being rejected by the culture? How was your acceptance within the organization?
Chris Jordan: I keep saying surprisingly, but it was surprisingly positive! I think there was pent-up demand to see some change happening. I’ve been very fortunate in being able to ask the “why” questions. I think when people grow up with things, if they've been in an organization for many years, they sort of just get used to the way things are done. And to have someone coming in from the outside and challenging it — just in an open way, not in any sort of negative or critical way — has been refreshing for a lot of people. I was very fortunate that there was a capability review of the tax office shortly after I started.
It was about a six-month project, done through the Australian Public Service Commission and what it did was reinforce to me that it wasn't just me being new to the public service, because I was often confused about “is this just a public sector type of matter or is it something within the ATO itself?” What this review did was point out quite clearly that a lot of the over-engineered governance processes were self-imposed by the tax office itself. People would approach things by trying to eliminate all risk. Now, we all know in our business lives that you cannot eliminate all risk, but what you can do is have a sensible and fit-for-purpose risk management framework. So as a general proposition, I did find a risk-averse, sharing-of-accountability culture with lots of meetings. Lots of people who were effectively playing with an issue because they were worried that, if they brought it to a close, they might not have covered everything and they might get it wrong.
So we've got to have a greater sense of purpose, a greater sense that time does cost money; it's a cost to the ATO, but, equally important, it's a cost to the person you're dealing with. And these are some of the significant shifts in a cultural sense, understanding that you can't hold on to things forever, you can't keep squeezing something. You have to make a judgement, you have to exercise common sense and ultimately, you have to make a decision and move on.
Alf Capito: To me that seems like a critical issue because in my experience, sometimes they just can't seem to let go. There’s almost a fear that if they make a mistake, if they give some revenue away, they'll be damaging their career. So how do you overcome that concept?
Chris Jordan: Cultural change takes a long time; it doesn't happen overnight. There will be a group of people, probably, in the ATO that won't make the change, but the overwhelming majority of people are saying “We're up for this.” I get people in the lifts, or buying a sandwich at the shop next door, tapping me on the shoulder and saying “This is great! I haven't felt more enthusiastic in many years about my job!” So I think what we've got to do is to say, “Look, people do make mistakes — I make mistakes, we all make mistakes. As long as they're not the same mistakes and you're only making new mistakes, then that's okay!” You're not doing the organization any good, you're not doing the country any good, and you're not doing yourself a great service by just holding on and just wanting to know more and more.
In your area at EY, well, what do you do? You manage risk; that's what an audit is about, that's what the work is about, so we have to have a greater sense of managing risk rather than always trying to eliminate it. No set of facts are so complex that, 12 months later, a taxpayer still has no answer on them. It's the process of decision-making that is overly complex, not necessarily the facts.
Alf Capito: I couldn't agree more. Now you mentioned the “why” question. Of course, one of the really interesting developments is that you were appointed from outside the organization — and the previous commissioner probably would have stood for another term — so the question arises, why did the government make the decision to have you appointed? There were business forums where the relationship between business and the ATO was very clearly stressed and strained. Given that, how are you trying to address the underlying issue of the problem that must have been there, which triggered your appointment?
Chris Jordan: That's a very good question and it's one that I've posed to the leadership group. There are three Second Commissioners that sit underneath me as Commissioner, and there are about 35 National Program Managers, Deputy Commissioners and First Assistant Commissioners that effectively run the tax office, and that is the same question that I've posed to them. You have to ask: what is the symptom here? Don't just look at the solution. It's like going to the doctor — you keep getting sore throats and you keep going back and getting a prescription — well, why are you getting the sore throat? That's the question I put to them. Why is it that the Inspector General of Tax had to come along? Why is it that an outsider was appointed? Why is it that the then-opposition, now government, is talking about more Second Commissioners, splitting the tax office and a new parliamentary oversight committee whose sole purpose is to scrutinize the tax office?
You have to address the symptoms of these responses before you can understand what the way forward should be. The tax office was probably becoming a bit isolationist and a bit inward-looking. It was taking a very black letter law approach to things: hence this long list of announced but un-enacted measures that the new government is just going through. I said we need to open the doors, open the windows, and let the outside in, but we also need to let the inside out as a two-way flow. This is not the cultural aspects of the tax office, it's not something that was generated by people who were in the tax office 20 years ago and have left; it’s result of the present leadership. They must confront that and be able to move on and say right, okay, now how do we go forward?
And it's got to be something that trickles down from the top. I can't just send out an email and say, “Everyone change, go forth please!” It's got to be embraced by the leadership, who must have their direct reports understand what cultural shifts are required, who then push it down to their team leaders. Being in an organization of around 25,000 people in many locations, it does require direct team leader to staff type interaction to generate over the longer term a change in attitude, a greater sense of purpose, a greater sense of time, and not to always default to be a protector.
People have used that word, “protecting.” Why don't we think about facilitating and service? I know when I talk about customer service in the tax office some people find it a little bit difficult, but that's what it's about. How do you want to be treated when you walk into a shop? You want to be treated with respect, you want to be treated as a customer; there's someone there you know and that they’re there to help you. And that's the way we need to have people treating taxpayers.
Alf Capito: You mentioned the backlog of issues and perhaps one of the reasons might be that the government has to constantly step in to change the law rather than the tax office facilitating a certain outcome for the business community. For example, the tax adviser profession has argued that the Tax Commissioner could be given statutory discretion in certain cases to be used mainly or essentially in favor of taxpayers to enable the tax office to make some accommodation within the law without constantly having to say “We sympathize with you, we see the problem, but there's nothing much we can do about it because you'll have to go and see the government to change the law.” What’s your view on that sort of discretion?
Chris Jordan: That issue does polarize people. You have the lawyers on the one hand saying you have to have black letter law —a ruling's not even good enough! Tax treatment has got to be in legislation: it's got to be clear, it's got to be written down in legislative form.
What I do know is that the present system isn't working particularly well. We have a lot of complex business transactions that evolve. Things don't stay static in business, so you might have a set of provisions that were created 10 or 20 years ago and the type of business they were originally designed for has moved on significantly. So the type of transaction just doesn't fit neatly, or sometimes at all, within the provisions that are meant to deal with it. So this issue of a relieving provision that the commissioner says looks like, sounds like, smells like, acts like a normal economic transaction that has a normal outcome — well, perhaps we should treat it like that because the alternative is to request Treasury to request the government to request a change in the law that may or may not happen.
One of the things I have done is create an integrated tax design unit within the ATO’s law design and practice group to better coordinate ATO activities. I think the ATO was a little bit of an issue here because many people within the organization who came across issues would request changes to the law. Treasury often found it difficult to prioritize - or sometimes even understand - the full ramifications of what was being asked, so in future there will be one, single ATO view. It will be coordinated through the integrated tax design unit, it will be done in plain language so everyone can understand what the problem is, it will set out a range of potential solutions, it will give some real-life examples with some diagrams and it will explain that this is being asked because we cannot administratively deal with it in any other way.
I think there is room for greater discretion. Under the current system, whilst we could clear up all these measures now, in ten years’ time we could have another hundred measures.
Alf Capito: I couldn't agree more, and obviously the governance around that would all be transparent.
Chris Jordan: Well, as long as I don't have a line of people outside my office every morning wanting a special deal done! That would not work; that would be really difficult. It's got to be a systemic thing; it's got to be something of a general nature, and we have a look at it and say “these provisions just don't work in this area anymore; either they need to be changed, but in the meantime, this is how we need to apply it.”
Alf Capito: The other category of issues that were on that unlegislated list were where the government or the tax office thought the general anti-avoidance rules weren't sufficient to fix the problem. It may well be that if Part IVA had been used in this set of circumstances, it would have avoided the problem. A good example of that might be the use of certain hybrid transactions where the tax office says, “Look, we've got to abolish 25902 and get rid of these interest reductions for integrity purposes”. Instead, the tax office could had have issued an alert on hybrids and said we're going to apply Part IVA in these circumstances. Perhaps people wouldn't then have gone down that path in the first place and you wouldn't have needed to change the law. It seems that the tax office keeps Part IVA in a box and brings it out only when they really need it, almost to the point that they don't want it to be used in fear that perhaps the courts might strike it down. But a lot of cases, had Part IVA been threatened or applied, may not have required a change in law.
Chris Jordan: There's an ongoing debate around the use of specific avoidance provisions versus general anti-avoidance provisions and that debate will continue.
There's probably not been a happy history with the success rate of Part IVA. I think it is a last resort-type provision; it's not trotted out up front. I think we need to be able to be flexible but also have the opportunity to use the whole array of measures that potentially could be used. And I think the point that you made about issuing alerts is a very important one. My perception is that we (the ATO) are often slow at stating our position publicly and it's something I've asked my senior people to get better at. Neil Olesen3 gave a speech recently where he said, instead of taking two years to issue a comprehensive ruling on a particular topic that covers every “if, but and maybe”, you might see a series of smaller, quicker alerts. I'm very, very happy with that because if we can say we've observed this (treatment), we don't particularly think it operates in that way for these reasons, at least it puts people on notice. I constantly get U-turns thrown up when people are quite broad in their application, so I think we've got to react to that, and we've got to put notices and alerts out much more quickly in a much shorter, straightforward manner.
Alf Capito: The other thing that you've done is set up an independent appeals unit within the ATO. Can you tell us about why you did that and how you see that operating?
Chris Jordan: There was a lot of angst around large disputes in the large business area, so what I thought was logical was to move the review function out of compliance, put it in the law design and practice area. This will have people that have not been involved in the audit or in the dispute in the past in fact report to a different Second Commissioner, and undertake to not just have a review on the process but a review on the merits. Now, often people get very passionate on both sides; they might have been in a dispute for four or five years (which I think is way too long and should not happen going forward) and people get into their respective trenches. The taxpayers are in their trench, the tax office is in its trench, and they're throwing reports over the top to each other. A big paper war — another position paper, another barrister's opinion — and I thought, well, how can we break that? We can break it by having more alternative dispute resolution processes to get someone sitting in the middle of these two parties in dispute to see if they can come a little bit closer together and maybe have a settlement opportunity. Or, you can have an independent review by someone else within the tax office, someone who has got no particular bent on any of the issues, have a look at it, on merit, and make a recommendation.
There has been one process-independent review already completed and there are seven in line to be completed before Christmas. We have a feedback loop so that we find out from the people if it met expectations, and whether it was transparent. And after about six months, we'll do a full review of it to see if we need to tweak it, but it's not just the fact that it's someone else within the tax office looking at it, it's the fact that it builds in some alternative dispute resolution processes and maybe builds in some external advice coming in as well. It just opens it up and says let's have another look at this. My view is that if we can't resolve something within two years then we're never going to resolve it. So we'll stop playing with things and we won't just let them drag on forever. If the court has to make a determination on it, so be it, but we're not just going to sit there and continue the paper war.
Alf Capito: I think that's a very welcome development; our brief experience with it has been quite a positive one so far. Now I know we spent some time during our plenary session here in Singapore talking about BEPS, but I can't pass up this opportunity to ask you more around the BEPS space. It comes down to this: even before there is any change in law going forward, the tax office seems to be taking a view that if you've got your arrangements set up appropriately, then that's great, but we're going to do an audit to make sure that you have got this transaction set up appropriately. So is it the case that it is quite difficult for companies to get APAs and sign-offs at the moment and how long do you see that being the case?
Chris Jordan: It's in a fairly narrow area, in the digital e-commerce space, that we're just pausing on some of the progress of the APAs. We just want to understand a bit more about what goes on. We want to test some propositions that have been put to us historically that say there is no taxing right here in Australia, because of certain structures. What I sometimes find is what looks good on the whiteboard doesn't get translated directly on the ground. I use the term from my old days when I did due diligence on acquisitions or due diligence tax 101 was to check any structures that had been put in place, particularly if they're a bit old, because what happens?
Something's been put in place five years ago, the tax manager changes, the CFO changes, no one really knows why it was there. So they do what they commercially would otherwise do and they don't relate back, and so we're finding a little bit of this just testing now as well. What was on the whiteboard, what was in the report that gets flopped on the table is not actually what happens on the ground! And that's actually quite logical because what happens on the ground is the commercial result of you trying to get me to buy something in this country that you have that I want, rather than some artificially picture of boxes all around the place with arrows going over the top, down underneath and around the corner sort of thing.
Alf Capito: One area where I think the tax office has been a leader without anyone really knowing it at the local level is in the eyes of many of the tax authorities around the world, in terms of its audit techniques and its risk-differentiation methodology, the company risk reviews, the continuous audit approach. Certainly in my travels, the ATO is seen as a leader in that space. Do you see a role there, especially around this region, in … training is the wrong word, but perhaps in mentoring and perhaps sharing some of those concepts with authorities around the region? \
Chris Jordan: There is a role for the ATO to help in capability building and bringing up the standards. My primary focus of course is to have the citizens of Australia think well of the tax office rather than other revenue authorities thinking well of the Australian tax office. But the ATO has been a leader — it is a leader - and part of that is because we're actually transparent, believe it or not! We publish a lot of our product and processes, and to the rest of the world, that's unusual to actually have our compliance product up on our website, for example. We do a lot of that and it's in that area that other revenue authorities think well of us.
I think that there's a larger role for what's called “SGATAR”, a study group of Asian tax administrations when you think of the size of the economies with China and Japan and Korea, Malaysia, Singapore and Australia, New Zealand and then Thailand, Indonesia, Philippines and so on. That’s a very significant grouping, and I think there's more that we can do there that we can feed into the OECD body, the forum on tax administration. I think when we do training courses, like we do for the Chinese tax authorities, my view is why don't we replicate them across the region? If you've got the material that's relevant for China, why isn't it relevant for maybe Korea or Japan or the Philippines or Thailand? So there is more we can do.
- Australian Order
- Section 2590 of the Income Tax Act of Australia: Debt deductions in earning nonassessable nonexempt foreign income.
- Second Commissioner at the ATO