Michael Carmody

Michael Carmody

What’s legal? What’s ethical?

What can we get away with? How do you measure up?

Michael Carmody

Like John, I decided that in approaching this task I had better do some research. Having done that it soon became obvious that ethics and taxation has been the subject of intermittent debate over many years, and I have to say without any general resolution. Views are generally polarised, each premised on what is said to be good public policy principles. Thus on the one hand, you have the view that derives from the role of taxation and its important community nature. This view is reflected in the often quoted notion of taxes being 'the price we pay for a civilised society'. On the other hand you have and equally principled rule of law view. Our society is based on the rule of law. To overlay any other measure, so this school of though goes is to introduce inappropriate subjectivity to this guiding principle. Continuing this line of logic leads to the conclusion that its people’s rights and advises responsibilities to minimise tax, including it seems taking advantage of loopholes provided by the courts and legislation. And having done all the research, it’s at this point that it seems a stalemate is reached and the debate stagnates, and I was given 15 minutes to talk and I wasn’t quite sure where I’d go from here.

It seemed to me that at the launch of such a forum we do need to stimulate debate. So to do that I though that I’d go to the heart of the issue, and in my view at the core of this debate is whether or not you subscribe to the view that tax is simply another cost and as such, is subject to the same entrepreneurial and cutting techniques as any other cost or expense. Now clearly that is not a view that I share. In my view, it reflects a fairly detached view of taxes perhaps popular on its surface but ignoring the very nature of this cost. To illustrate why I say that, let me pose this question: Would we take the same accommodating view of the sort of entrepreneurial activities taken in the tax area if instead they were applied directly to reduce the number of hospital benefits available to the sick, or to prevent education of Australian kids?

That brings me to the nub of the point I want to make this evening. To me, the rule of law argument is a distraction in this debate. It is a straw man to the extent that it is put to preclude recognition of the distinct value of taxation. To me, it’s a clinical debating point that fails to recognise that attitudes and values invariably affect the choices people make, they preparedness to push the boundaries and the way the laws are applied, ruled on by the courts and indeed, framed. This is the true nature and influencer of ethical behaviour. It is about standards and values set by community culture which in turn directly influence the decisions and behaviours of its members.

Now further justification or straw man sometimes put forward a view that taxes are something to be minimised at all cost is the claim that the particular system is faulty, unfair or otherwise not to their preferred design; a convenient justification perhaps, but not one that can wash today. To mount it now is to in effect, mount an argument against the very nature of our democratic society. Once the final shape of our business tax-system emerges from parliament, we will have a tax-system that has been subject to unprecedented public debate and parliamentary scrutiny. We will also have a tax-system that will be subject to further refinement and adaptation in a more open and planned way following the Government’s adoption of new processes for the development of taxation legislation and introduction of a new advisory board on taxation.

Lest there is any doubt, I have firmly committed the ATO to embracing and supporting those new processes. Doctor Alan Preston who is Secretary to the Ralph Review, has now joined the ATO as a second Commissioner. His charter from me is clear, to remove by our actions any lingering doubts that our commitment to new and more openly consultative development of tax law within the framework agreed by the government is firm and strong.

Let me return then to the central question which is whether we should as a community, place a value on taxation that distinguishes it from other expenses. To me there are two good reasons for doing that. The first that I’ve mentioned is the nature of taxation. It is in reality healthcare, education, security and services for you, me and other Australians. There is a community nature and responsibility that distinguishes it from, for example, the costs of parts or other supplies. The second very good reason is a recognition of the high-costs to the community of a prevailing or at least substantial culture of accepting taxes as just another field of entrepreneurial and cost-cutting. High community costs include:

• Potentially massive raids on the communities revenue through entrepreneurial development and mass marketing of schemes. A $3.5 billion and growing figure for identified claims under schemes we’re currently challenging should be sufficient to illustrate this.

• Further costs are the evidence of serial bankruptcy and scheme participation to avoid a tax liability arising or simply to avoid what is an acknowledge tax-debt.

• Yet another cost is a history of incentives designed admirably to assist particular public or industry policies being compromised because of abuse when the money men arrived to enhance the benefits and the costs of these incentives.

• There is also the history of increasing complex and defensive legislative responses to increasingly complex and contrived schemes which has had a flow on effect on cost of compliance to all tax-payers.

• And finally, and this is particularly relevant at this time, is the enormous opportunity cost of the energy and talent that goes into devising and marketing aggressive schemes, talent and energy that could be channelled into building more productive and more internationally competitive Australian businesses.

Changing some attitudes to our tax-system is in my view, the remaining element that can give a major impetus to achieving a genuine new tax-system in its newest sense. We have had extensive parliamentary inquiries into the shape of our new tax-system. Wouldn’t it have been good to have had an inquiry on this subject? Perhaps such an inquiry would have help us move past the stalemate I mentioned earlier, and more importantly, further the process of shaping community attitudes. Put another way, it might have given appropriate recognition to soft-systems surrounding the tax-system so as to compliment the hard-systems of law and administration.

Sharing with you a draft terms of reference for such an inquiry would help illustrate what might be done to reinforce the distinct nature of taxation, and what embracing such a recognition might mean. Perhaps such an inquiry could have been charged with answering the following questions:

• Are indeed taxes a cost or expense to be treated like any other? Or is there an intrinsic community value that needs to be recognised? If so, how do we promote a culture that recognises that community value?

• What signals can we send about the values of taxes? Should, for example, the standards applied by professional bodies where their members are involved in tax advice or not, include requirements about meeting their tax responsibilities and what should be the consequences of failing to do that? To illustrate the latter question, in 1997 the Legal Services Tribunal found that a barrister who had been convicted and fined on over 30 offences relating to failure to lodge tax returns, no payment of tax and failure to comply with court orders concerning his tax obligations, had not committed professional misconduct. The Tribunal held that this failure to meet his taxation obligations did not make him unfit to practice law as a barrister. Now, I wonder what message that send to the community about the value of this tax-system? And if the lack of professional requirements in this area were to lead to wide-spread behaviour of this kind, what would that say about the underlying values reflected in advice to clients?

• Another question such a committee could have been charged with answering was: should there be specific administrative penalties that attract directly to promoters and marketers of schemes to which anti-avoidance provision apply? Presently, it is the participants placed in schemes by promoters who suffer administrative penalties. There is no direct penalty to chasing prospective promoters and marketers.

• A further question that could have been explored: should people who go to the media to expose the harshness of their treatment under our tax-system and by the tax-office forego the right to secrecy about their tax affairs so that the public get a fully balanced presentation? I’ll have to share with you that it’s not uncommon these days for people to use the threat of going to the media as a bargaining tool with us. The presentation that follows the media is sometimes very different from the facts. Given such stories can have a negative impact on the community’s confidence in the system, and given the comprehensive rights of review, appeal and rights to go to the Ombudsman that are available, should the benefits of the secrecy provisions be retained in these circumstances?

• Another question to be posed: are there avenues for positive recognition for those in the community who contribute to the integrity of the tax-system? Is there scope for public ambassadors of our tax-system who can credibly connect the tax-system to community services? Who a community education or advertising campaign be appropriate and useful for this?

• Is there more the ATO could do to support this cultural shift? From our perspective, through embracing the Tax-Payers Charter and the related compliance model for our strong stand in such areas as aggressive tax planning by high-wealth individuals and others, and in our comprehensive approach to educating the community about the new tax-system, we are demonstrating we are genuinely concerned to give a fair go to the community and to individual members of the community and their dealings with us. But is there more that we in the tax office can do?

Just in wrapping up, it seems to me that facing up to issues such as these offers the prospect of a better way for our tax system; one that will build substantially on the benefits of our new tax-system. The question is: are we prepared to give it a go?

Thank you very much.