The Future of the Tax Profession
Table of contents
List of recommendations
Chapter 1: Introduction
Chapter 2: Technology impacting on the tax system
Chapter 3: International revenue authority approaches
Chapter 4: Opportunities and challenges presented by emerging technologies
Chapter 5: Technology and policy change
Chapter 6: The future of professional regulation
Appendix 1: Terms of Reference
Appendix 2: ATO’s priority themes of work
Appendix 3: ATO’s response
Appendix 4: TPB response
Telephone: (02) 8239 2111
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Level 6, 321 Kent Street
Sydney NSW 2000
GPO Box 551
Sydney NSW 2001
The Hon Stuart Robert MP
Canberra ACT 2600
The Future of the Tax Profession
I am pleased to present you with my report of the above review which was undertaken in response to a request from the Commissioner of Taxation (Commissioner) as well as concerns raised by stakeholders within the tax profession.
The review examined the challenges and opportunities presented by new and emerging digital technologies, along with the accompanying social, policy and regulatory impacts on the administration of the tax system and the tax profession.
The review highlights the need for all participants within the tax system to take prompt action to address the upcoming challenges and realise the benefits presented by emerging opportunities. Given the interconnectedness of the Australian Taxation Office (ATO), the Tax Practitioners Board (TPB) and tax professionals, it is imperative that they take collective and well-coordinated action which can only be achieved through a strong and collegiate working relationship. It is regrettable, therefore, that in recent years, the working relationship particularly between the ATO and the tax profession has been strained through ongoing IT stability issues and unfortunate ATO commentary such as those in a recent speech by the Commissioner regarding work-related expenses. Building on previous IGT reviews, there are further recommendations in this review aimed at improving this crucial relationship.
Overall, nine recommendations (comprising 28 parts) were made, three parts for the Government’s consideration, 19 parts for the ATO and the remaining six parts for the TPB. The TPB has agreed to all recommendations made to it. Whilst the ATO had initially indicated agreement with the majority of recommendations, in the final stages of the review, it conveyed disagreement with eight parts of the recommendations. The ultimate disagreements are with parts of the recommendations aimed at enhancing the ATO workforce, assisting tax practitioners to prepare themselves to meet the future challenges and ensuring that the fragile relationship between tax practitioners and the ATO is carefully managed.
Notwithstanding the disagreement above, the ATO has agreed with the remaining parts of the recommendations and has advised that seven were either implemented before the completion of this review or were to be achieved as part of its existing programmes of work. Whether the ATO’s implementation or existing programmes of work address the concerns raised with the IGT will be a matter for its Audit and Risk Committee. However, if these recommendations are not appropriately implemented, the IGT may have to conduct its own follow-up review.
The three parts of recommendations for the Government’s consideration relate to reforming work-related deductions which will assist to fully realise the benefits of automation, enhancing whole-of-government digital transformation and bolstering the sanctions that the TPB may impose on non-compliant tax professionals.
I offer my thanks to all who contributed to this review including IGT, TPB and ATO staff, tax professionals and their professional associations as well as taxpayers.
Inspector-General of Taxation
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The Inspector-General of Taxation’s (IGT) review into the Future of the Tax Profession was undertaken in response to a request from the Commissioner of Taxation as well as concerns raised by stakeholders within the tax profession.
The review examined the challenges and opportunities presented by new and emerging digital technologies, along with the accompanying social, policy and regulatory impacts on the administration of the tax system and the tax profession. It highlights the need for prompt and well-coordinated action by all within the tax system to manage the challenges and opportunities ahead.
As technology advances, whilst it may facilitate ease of compliance for taxpayers, it may create new complexities and the services required from tax professionals may vary accordingly potentially requiring changes to their business models. There are also opportunities for both the Australian Taxation Office (ATO) and the Tax Practitioners Board (TPB) to consider devolving certain aspects of their functions to the profession or professional associations, where that work could be undertaken more efficiently or cost-effectively.
The ATO plays a critical role in preparing the tax system for the future and its own technological innovation program is a key factor. The important role of tax practitioners within the Australian tax system must also be acknowledged. Given the interconnectedness of the ATO, the TPB and tax practitioners, it is imperative that they take collective and well-coordinated action. Such action is only possible through a strong working relationship. However, in recent years, the working relationship particularly between the ATO and the tax profession has been strained as a result of persistent IT outages and stability issues as well as unfortunate ATO commentary such as those in a recent speech by the Commissioner regarding work-related expenses. There are recommendations in this review which are aimed at improving this important relationship.
The IGT has also identified opportunities for the ATO consider its future workforce capability needs. Whilst some work has already been undertaken, it does not appear to have been done at the whole-of-ATO level. Additionally, as advancing technologies pose greater risks to the tax system, recommendations have been made to the ATO to consider its approaches to identifying and managing emerging tax issues as well as cyber security risks.
The TPB also plays a significant role in the tax system by regulating tax practitioners. The IGT observed that the TPB’s role may need to expand in the future to keep pace with developments in the tax profession and workforce more generally. Specifically, the IGT believes that the TPB should consider the flexibility of the regime established by the Tax Agent Services Act 2009 to deal with a wider range of professionals who may provide tax services in the future. Moreover, where emerging technology enables more unregistered people to provide tax services, the TPB would have to determine the extent of such risks and be prepared to address them including through collaboration with the ATO, the Australian Securities and Investments Commission and the Australian Competition and Consumer Commission.
Overall, the IGT made nine recommendations comprising 28 parts (three parts were for the Government’s consideration, 19 parts for the ATO and six parts for the TPB).
The three parts of recommendations for the Government’s considerations relate to reforming work-related deductions which will assist to fully realise the benefits of automation, enhancing whole-of-government digital transformation and bolstering the sanctions that the TPB may impose on non-compliant tax professionals.
The TPB has agreed with all recommendations made to it. While the ATO had initially indicated agreement with the majority of the IGT’s recommendations, it ultimately disagreed with eight parts of recommendations. The disagreements relate to those parts aimed at enhancing the ATO workforce, assisting tax practitioners to prepare themselves to meet the future challenges and ensuring that the fragile relationship between tax practitioners and the ATO is carefully managed. Notwithstanding the disagreements, the ATO has agreed with 11 parts and has advised that seven of these have been implemented or are part of an existing programme of work. The appropriate implementation of recommendations and whether existing programmes of work address the concerns raised in this review are matters for the ATO’s Audit and Risk Committee in the first instance.
Given the level of the ATO’s disagreement, the benefits of the package of recommendations made in this review may not be fully realised. To the extent that concerns persist, the IGT may either undertake a follow-up review of the ATO’s implementation of the recommendations or commence a new review covering the same or similar areas.
List of recommendations
The IGT recommends that:
a. the ATO:
i. in collaboration with its staff and the unions, develop a roadmap outlining its current position, desired future state and how it intends to make the transition from one to the other, including redeployment and upskilling options for staff and support them through the transition;
ii. in consultation with recognised professional associations, offer assistance to tax practitioners who may wish to develop their own roadmaps to transition from the current to future states; and
iii. engage with the professional associations, tertiary institutions or other education providers to co-design training programs and courses to upskill ATO staff for the roles of the future; and
b. the TPB:
i. implement a framework to periodically review its workforce capability needs to meet future regulatory and compliance challenges; and
ii. in consultation with recognised professional associations, offer assistance to tax practitioners by, for example, providing advice on whether their future plans meet the ongoing obligations of the Tax Agent Services Act 2009.
The IGT recommends that the ATO:
a. conduct a cost-benefit analysis on the design and production of its own software solutions as compared to outsourcing the work to the private sector;
b. in collaboration with the relevant professional bodies, implement a communication strategy to inform tax practitioners of its research and adoption of new technologies that may impact on them and their business;
c. expand its beta testing program to reach as wide a spectrum of tax practitioners as possible, particularly those operating small businesses or who are remotely located;
d. assess the number of taxpayers who will continue to require access to traditional methods of communication, and use that research to develop a plan for meeting the needs of those taxpayers in the future;
e. determine the effectiveness of automated decision making tools to minimise the risk of under compliance or over compliance and ensure they are periodically tested to produce accurate outcomes;
f. consider whether it can devolve some of its functions to tax practitioners with appropriate safeguards;
g. align its service standards for the performance of its systems with those of commercial providers, including a dedicated scheme for compensation where outages or system failures result in loss for the users;
h. engage with the tax practitioner community to develop an action plan to bolster the stability of systems which enable them to assist the community to comply with their tax obligations, including an updated timeframe for the migration of the Tax Agent Portal functionality to ATO Online; and
i. ensure that any future messaging regarding concerns it may have with the tax profession is appropriately considered and accompanied by robust and properly tested data.
The IGT recommends that the ATO review its current framework for monitoring and identifying new or emerging technologies or innovations to ensure that it is able to take prompt action to address any tax implications.
The IGT recommends the:
a. Government consider reform of the work-related expense deduction regime, having regard to prior reviews in this area, including the possibility of introducing standard deductions with a view to eliminating the need for most individuals to lodge income tax returns; and
b. ATO engage with:
i. third party data providers to maximise access to reliable information whilst minimising costs and disruption to their business and systems; and
ii. the CSIRO’s Data61 group on the latter’s work on machine-readability of tax laws.
The IGT recommends that the Government, in seeking to improve the administration of the tax system as well as public service delivery more broadly, consider whether the Digital Transformation Agency, or a similar agency, should adopt a more comprehensive role in driving the whole-of-government digital transformation.
The IGT recommends that the ATO:
a. review its current internal arrangements for identifying and responding to cyber security risks to ensure efficiency, effectiveness and, in particular, that responsible areas within the ATO are clear on their remit, communicate and share intelligence appropriately and deliver a unified and coordinated response in addressing the risks;
b. assist tax professionals, particularly those operating in small practices, to develop and maintain their own cyber security risk management and response plans; and
c. broadly communicate and inform the public about the measures it has implemented to mitigate risks of cyberattacks and data breaches.
The IGT recommends that the TPB, in consultation with recognised professional associations, undertake research to determine if its policies and procedures appropriately cater for all tax professionals within its jurisdiction, including tax (financial) advisers.
The IGT recommends that the TPB:
a. periodically review the suitability of the educational requirements of the Tax Agent Services Regulations 2009 and its own related guidance with input from practitioners, professional associations, tertiary institutions and the ATO and act upon any findings including requesting the Government to consider legislative change where necessary; and
b. consider whether the TASA regime provides sufficient flexibility to manage the range of professionals who may offer tax services and present its findings to the Government.
The IGT recommends that:
a. the Government consider increasing the range of sanctions that the TPB may impose on non-compliant tax professionals, including empowering the TPB to release information to the professional associations, in appropriate cases, to enable the latter to undertake disciplinary action against their members;
b. the TPB undertake research to determine the extent to which tax services may be offered in the gig economy by people who are not appropriately registered and engage with other agencies, such as the ATO, the Australian Competition and Consumer Commission and the Australian Securities and Investments Commission to consider options to protect taxpayers from such service providers; and
c. the ATO broaden the membership of its Tax Profession Future State Working Group to include new entrants into the tax profession such as digital service providers, tax (financial) advisers and their representative bodies as well as publish more comprehensive information about the work of the Group.
Chapter 1: Introduction
Conduct of the review
1.1 The Inspector-General of Taxation’s (IGT) review into the Future of the Tax ProfessionThis review is undertaken pursuant to section 7(1)(d) of the Inspector-General of Taxation Act 2003 and the report is produced pursuant to section 7(1)(f) of the Inspector-General of Taxation Act … Continue reading was undertaken in response to a request from the Commissioner of Taxation (Commissioner) as well as concerns raised by stakeholders within the tax profession, particularly tax practitioners, through our complaints handling service and in our other engagements with tax professionals.
1.2 In 2015, the IGT undertook a review into the Australian Taxation Office’s [ATO] services and support for tax practitioners.Inspector-General of Taxation (IGT), Review into the Australian Taxation Office’s services and support for tax practitioners (2015). That review largely examined the ATO’s relationship with, and services provided to, tax practitioners at the time. The current review is not intended to be a follow-up to the 2015 review but, rather, it is a forward looking examination of a range of current and future factors, such as advancement in technology, that are likely to reshape the tax profession and the way tax systems may be administered.Terms of reference for the review were announced on 6 June 2017, a copy of which appears in Appendix 1.
1.3 The IGT received a range of submissions and also consulted with a number of stakeholders including taxpayers, registered tax and Business Activity Statement (BAS) agents and their representative bodies, tax (financial) advisers (TFAs), academics, legal practitioners, software providers and industry associations as well as senior staff at the ATO and other government departments to gain a better understanding of the issues. From these submissions and consultations, the IGT distilled four main themes under which the review was conducted, namely:
policy changes; and
1.4 The IGT review team has undertaken considerable research and turned to an extensive body of literature in discerning the upcoming changes, the challenges they pose and the opportunities for the ATO and professionals working in tax to meet those challenges and reap the benefits. In doing so, a range of international revenue agencies have been consulted to understand their approaches to the future changes and initiatives to address them.
1.5 The IGT review team has also worked progressively with senior management of the ATO and the Tax Practitioners Board (TPB) to distil potential areas for examination and future action.
1.6 The Commissioner and the Chair of the TPB were provided an opportunity to make submissions on any implied or actual criticisms in this report.In accordance with sub-section 8(5) of the Ombudsman Act 1976 which has effect by virtue of section 15 of the Inspector-General of Taxation Act 2003. In addition, the TPB also lodged a formal written submission in response to the IGT’s terms of reference.
Professionals, disruption and the future
1.7 This review is about the future but it does not to seek to predict the future – history is littered with failures on that account – nor is it to engage in picking economic winners and losers for the tax profession.
1.8 Whilst it is the first time that the IGT has conducted a review that is largely forwarding looking in nature, where relevant, at certain points the current state of play regarding the tax profession will be required to contextualise the propositions or forecasts that have been advanced by various parties.
1.9 Engaging in a future state discussion does require a consideration of what changes are expected to impact upon those parties within particular groups or the underlying functions they perform. Many of the anticipated or touted changes are not unique to the tax profession — the review is being conducted with respect to a specific profession but the relevant developments have far wider impact. Indeed, at the extreme boundaries, it is the entire social and economic fabric of society that is evolving. We are on the cusp of a total ‘paradigm shift’ in how we live our lives. As the Executive Chairman for the World Economic Forum stated: ‘[t]he changes are so profound that, from the perspective of human history, there has never been a time of greater promise or potential peril’.Klaus Schwab, The Fourth Industrial Revolution (2016) p 2.
1.10 The source of the changes is the quantum leap in technology which is considered in Chapter 2. These technologies that have or are anticipated to emerge are commonly referred to as being ‘disruptive’ for a range of social, political and economic endeavours. Groups that may have been previously exempt from such changes may now also be disrupted. These affected groups include professional services or so-called ‘white collar’ jobs. The expectation is that these roles are being, and will continue to be, substituted by machine based capital.
1.11 There is a key overarching theme which is ‘this time it’s different’ because of the likelihood and consequences of the changes. Of course claims of this nature have been made before. When new technologies largely diminish previous services or supplies, they pose serious challenges and opportunities depending upon your relative position. Improved technology, in the form of substituting human capital for machine capital, is not new and, throughout history, has been adopted out of competitive need or for survival.
1.12 The industrial revolution was a major transformation of social and economic arrangements. The process of labour or service substitution by machine based capital was applied in many industries at that time – a process that has continued to the present day. At that time, new roles, such as mechanical engineers, did emerge through that process of change.
1.13 A more recent example of current technology disruption presented in the media is the driverless or automated vehicle. The likely effect and expectation is that human drivers are replaceable. The advent of such change is also expected to have so-called ‘knock-on’ effects, in the form of risk transfers. For example, insurance premiums may reduce significantly due to the lower incidence of accidents.Oliver Ralph, ‘Cost of car insurance to plunge with rise of driverless vehicles,’ Financial Times (28 June 2016) <https://www.ft.com>.
1.14 While all professionals have been cited as being at risk of machine capital substitution, taxation and audit related work have been identified as being ‘at particular risk from technology’.Richard Susskind and Daniel Susskind, The Future of the Professions – How Technology will Transform the Work of Human Experts (2015) p 88. An interesting underlying point of distinction is also raised in this context, namely that professions will continue to be needed but professionals currently conducting them may not or at least not in the manner in which they have been conceived historically.
1.15 The objective of this report is to provide insights regarding presently emerging and anticipated technologies to enable tax professionals to better inform their decision making process and consider the implications for their business models and livelihood. The aim is to forearm tax professionals regarding their own assessments of strengths, weaknesses, opportunities and threats in a manner that is empowering and, in doing so, promote positive and proactive thinking rather than conjure doomsday scenarios.
1.16 Change has been, and will be, a constant companion of the tax profession. The approach should always be to consider how one adapts to take advantage of that change. By way of progression using the earlier example, prior to the automobile driver there was the horse and cart coachmen. The latter still exists but on a smaller scale fulfilling an altered function.
1.17 Indeed, currently, there is no universal agreement on what constitutes a tax professional.It should be noted, however, that the Tax Agent Services Act 2009 defines ‘registered tax practitioner’ as including tax agents, BAS agents and tax (financial) advisers. Taxation, as a regulatory obligation, touches nearly every facet of modern life and as will be seen there are currently a myriad of professionals engaged in its various aspects. The key point underlying the review is to anticipate the likely responses of consumers or taxpayers in the future. In particular, what professional services consumers or taxpayers will want and how much they would be willing to pay, as compared to alternatives that may emerge. The underlying success of a taxation system rests upon the achievement of vertical and horizontal equity for citizens and the economy it serves.Richard Tresch, Public Finance: A Normative Theory, 3rd ed. (Academic Press, 2014) pp 171 and 175.
1.18 It is also important to appreciate the views of certain stakeholders and commentators who argue that while new technologies will have an impact, the nature of it is more limited in magnitude and likely to arise over a much longer term. Furthermore, the emerging and anticipated technologies carry a range of downside risks that may impact on their effectiveness. Some of these risks arise from perverse incentives that are actually enabled by the newer technologies, such as the continued growth in identity crime. These downside risks are often referred to collectively as ‘cyber risks’ and are not new but are being enabled in a manner that is highly scalable and pervasive in impact.
Terminology used in this report
1.19 Throughout this report the IGT has adopted the term ‘tax professional’ in the general sense of referring to professionals working in tax. Given the nature of tax and its relationship to nearly every facet of modern life, the numbers of professionals whose work relates in some way to tax is myriad. The IGT will explore the definition and the need for regulation in detail in Chapter 6.
1.20 The term ‘tax practitioner’ is used to collectively refer to only registered tax and BAS agents. Where necessary, for clarity of discussion, the IGT will specifically refer to other tax professionals such as TFAs, digital service providers (DSPs) including software developers, and legal practitioners.
Structure of the report
1.21 The report is arranged under the four main themes identified in the terms of reference, namely technology, social, policy and regulation. Accordingly, it is divided into the following chapters:
Chapter 2 outlines the current and anticipated technological advancements that are driving digital disruption and the potential future application to tax administration and the work of tax professionals;
Chapter 3 provides an international perspective on the adoption of new technologies across a wide range of revenue authorities in search of emerging best practices;
Chapter 4 discusses the nature of the social impacts and opportunities presented by technological changes on the community, the tax profession and the ATO to foster greater understanding and empower decision making;
Chapter 5 considers matters potentially requiring policy change in the tax and superannuation system arising from the technological disruption; and
Chapter 6 examines the current role of the TPB in regulating the tax profession, followed by the potential expansion of the profession to include wider disciplines and its regulation in the future.
References made in this report to particular commercial firms, software or platforms are for illustrative purposes only. They should not be taken to be endorsement by the IGT.
Chapter 2: Technology impacting on the tax system
2.1 The rapid pace and growth of technological advancements in recent times has seen the emergence and anticipation of a range of innovations which give rise to new ways of working and doing business. These technologies have numerous applications across multiple industries, including the tax profession.Piergiorgio Valente, ‘Digital Revolution. Tax Revolution?’ (2018) 90(1) Tax Notes International, p 117. Accordingly, there is no universal or detailed awareness of the technologies that exist presently or those anticipated in the future.
2.2 Given that these technologies are the fundamental driver giving rise to disruptions in the economy, including the tax profession, it is appropriate to provide an overview of them and establish a firm foundation for the discussion that follows.
2.3 The opportunities and challenges presented by technology, from the perspective of revenue authorities across the globe, is outlined in Chapter 3. This international analysis provides important background for Chapter 4, which explores the issues, in the Australian context, for tax professionals, taxpayers and the ATO.
2.4 Artificial intelligence (AI) refers to machines that can mimic human intelligence to perform certain tasks. One form of AI is ‘machine learning’ which provides computers with the ability to adapt or learn when exposed to new data without being specifically programmed to do so.Chartered Accountants Australia and New Zealand (CAANZ), The Regulator of 2030: Regulating our digital future (June 2017) p 10; Cameron Cooper, ‘5 ways accountants have mastered AI’ (15 September … Continue reading
2.5 IBM Watson is one example of AI used in business. It is a cognitive computing platform that can analyse unstructured data, understand natural language questions which can have multiple meanings to determine what is being asked and present answers based on supporting evidence.IBM, 101 Guide: Talking about Watson (undated), p 5 . For example, within the insurance industry IBM Watson has recently been integrated into Suncorp’s online claims process to streamline more than 500,000 motor claims per year. The system has the ability to understand colloquialisms and Australian slang to analyse customer descriptions of motor accidents and determine liability. It enables a claim to be lodged, excess paid and repairs booked within 5 minutes, a process which historically would have taken 24 to 48 hours. In its trial period, the IBM Watson technology was able to accurately determine liability for approximately 90 per cent of claims.Suncorp, AI technology helps customers get back on the road sooner (1 November 2017) .
2.6 One of the benefits of AI is its ability to complete time consuming tasks, such as research or information retrieval, more accurately and efficiently with minimal manual input thereby allowing its users to focus on other activities, such as those requiring complex analysis and judgment.
2.7 Whilst AI brings many opportunities to provide a more efficient and cost-effective way of working, it could also significantly disrupt traditional work practices across a range of industries including tax.Steve Healey, The Future Professional (Paper presented at the Tax Institute 32nd National Convention, Adelaide, 16 March 2017) p 15. There are a number of examples of AI applications within the tax environment. In 2016 KPMG announced plans to:KPMG, KPMG invests in game-changing cognitive technologies for professional services (Media Release, 29 June 2016) <home.kpmg.com/au/en/home>.
… further increase its cognitive capabilities and apply IBM Watson cognitive computing technology to a range of its professional services offerings in Australia.
2.8 KPMG stated that the use of this AI technology in audit will provide the ability to analyse and act on larger sets of financial and operational data to deliver greater insights.KPMG, KPMG invests in game-changing cognitive technologies for professional services (Media Release, 29 June 2016) <home.kpmg.com/au/en/home>.
2.9 Internationally, IBM Watson has also teamed up with H&R Block. It is used by H&R block tax practitioners to provide clients with access to a more engaging and personalised tax experience that has the ability to ‘uncover every deduction and credit available’.H&R Block, Taxes will never be the same (undated) . To do so, the technology takes into account what has happened in the taxpayer’s life in the last year and highlights areas of possible tax implications.
2.10 The Artificially Intelligent Legal Information Research Assistant, otherwise known as Ailira, is an example of how AI can be implemented to support tax professionals in legal and tax research. In addition to such research, Ailira can also help with business structuring, wills and estate planning as well as creating legal documents.Ailira, About Ailira (undated) <www.ailira.com/about.html>. Similar to IBM Watson, Ailira scans information from tax law databases, legislation and ATO rulings to answer questions posed in natural language.Tax & Super Australia, Can AI deliver what tax practitioners need? (3 August 2017) <http://taxandsupernewsroom.com.au>.
2.11 It is also important to acknowledge some commentators’ claims that the disruption in the case of AI may be overstretched in terms of expectation. For example, it has been likened to ‘Excel spreadsheets on steroids’,Vivek Wadhwa, ‘Don’t buy the hype: AI isn’t taking over decision-making’, Sydney Morning Herald, 19 March 2018. and ‘only as good as the data it receives and is able to interpret it only within the narrow confines of the supplied context.’Vivek Wadhwa, ‘Don’t buy the hype: AI isn’t taking over decision-making’, Sydney Morning Herald, 19 March 2018. In another case, the claim was that the AI of today cannot create, learn common sense or reasoning, deploy human judgment or professional scepticism.Rachel Grimes, ‘The Changing Face of the Accountancy Profession’, Bloomberg BNA (28 September 2017) .
2.12 The challenge is that while there is a range of perspectives on AI, the weight of support and investment is such that it is undeniably a scenario that needs to be considered regarding the future.
2.13 Blockchain technology is a form of distributed ledger technology — an open and de-centralised ledger that records information in individual blocks. Blockchains are managed and continuously verified by participants within the chain, thereby providing certainty that the information has not been altered.Maria Teresa Fabregas, ‘Blockchain technology: why does it matter for tax administrations?’ (2017) Disruptive Business Models, Intra-European Organisation of Tax Administrations, p 34; John … Continue reading It allows for the sharing of trusted information amongst its participants without the need for third party verification.
2.14 One of the most well-known applications of blockchain technology has been cryptocurrency, specifically Bitcoin, and the online platform through which it is traded. Bitcoin, and its underlying technology, was first proposed in 2008 as a:Satoshi Nakamoto, Bitcoin: A Peer-to-Peer Electronic Cash System (31 October 2008) p 1.
… purely peer-to-peer version of electronic cash [which] would allow online payments to be sent directly from one party to another without going through a financial institution.
2.15 The value of blockchain technology lies within:Deloitte, Blockchain; Enigma. Paradox. Opportunity (2016) p 9.
- increased speed of transactions;
- increased transparency in the case of public blockchains;
- increased confidence in the data which reduces the risk of fraud and errors;
- the removal of the central authority in order to process electronic transactions, such as a financial institution or clearing house; and
- the ability to enable or restrict access as necessary.
- 2.16 It is likely that blockchain technology would have a significant impact on processes which contain verification activities or where verified and trusted transactions are required.26 Figure 2.1 below shows the various applications for blockchain, ranging from digital identity to digital assets, distributed apps and smart contracts.27 It is important to note that these applications permeate many industries.
Figure 2.1: Applications of blockchain
2.17 As shown in Figure 2.1 above, blockchain technology is revolutionising the way in which industries operate with applications such as ‘distributed trading’ and ‘asset ownership’. On 7 December 2017, the Australian Securities Exchange (ASX) announced that it is replacing its current system to record shareholdings and will manage the clearing and settlement of transactions with distributed ledger technology.28 The new technology will allow for clearance and settlement to occur directly between participants, resulting in simpler, faster and more secure trades,29 reducing costs for customers and ‘put[ing] Australia at the forefront of innovation in financial markets’.30
2.18 Furthermore, applications of blockchain also include authenticating asset ownership as set out in Figure 2.1 above. For example, Australia’s largest gold refiner, the Perth Mint, has plans to use blockchain technology and cryptocurrencies to draw investors back to precious metals. The Perth Mint plans to back their own cryptocurrency with physical precious metals which will have the dual benefit of stabilising the value of the cryptocurrency as well as the efficient and real time settlement of transactions.31
2.19 Internationally, Estonia and the Netherlands have also explored the benefits of blockchain technology. It has been implemented widely in Estonia, including many of Estonia’s judicial, legislative and security registries to ‘protect national data, e-services and smart devices both in the public and private sector’.32 The Netherlands has trialled the application of blockchain technology to payroll tax.33 For more information, please see Chapter 3.
2.20 Within the tax profession and regulatory bodies, blockchain can be used in audits, as shown in Figure 2.1 above, to reduce the compliance burden and audit costs whilst at the same time, increasing accuracy and promoting trust. For accountants, it would mean less transactional processing and reconciliation as transactions are added by the parties involved and then automatically verified. Given that this then leaves an automated audit trail in real time, it could see a disruption in the work of auditors who would normally verify those transactions.34 Financial data from the Big 4 accounting firms already show a decline in the proportion of revenue they derived from audit activities across four financial years from 2014 to 2017.35
2.21 Tax professionals in advisory services will also be affected by blockchain technology. Similar to other technological advancements which may impact the profession, tax professionals will be increasingly engaged by clients to provide advice on the adoption, implementation and integration of this technology into their businesses. This would likely generate new business for tax professionals in the areas of systems solutions, cyber security and technology based audit expertise.36
2.22 The benefits associated with blockchain technology in relation to decreased reconciliation and audit costs as well as increased audit accuracy also apply to revenue agencies such as the ATO. Given that data cannot be altered or deleted on a blockchain and is continuously verified, the ATO will have greater trust in the data. In addition, as blockchain technology operates in a decentralised network, there is no central point of failure and as such, it is more resilient to malicious attacks.37
2.23 In conducting compliance activities and prefilling returns, the ATO often relies on third party information from the private sector obtained from financial institutions, share registries and health funds. As these businesses start to consider how blockchain technology may be implemented in their operations, revenue agencies such as the ATO have the opportunity to involve themselves in the design of governance structures so that any new standards will be developed in line with its requirements. Revenue agencies may also benefit from actively encouraging the private sector in participating in the blockchain ecosystem to make the most of the opportunities presented by blockchain technology.38
2.24 It should be noted that blockchain technology is still in the very early stages and while the benefits are well documented, many of the risks associated with the technology are still emerging. These may include data security, privacy, lack of standardisation and jurisdictional risk.39 Some commentators have raised concern that blockchain technology is ‘overhyped.’40 Specifically, the challenge is said to be its large storage and energy requirements.41 In one example, a Bitcoin software client was reported to only process 5 to 7 transactions per second in comparison to Visa which processes 25,000 transactions per second.42
Robotic processing automation
2.25 Robotic processing automation (RPA) replicates tasks that would otherwise be performed by a human. It increases business efficiency as tasks are performed faster, more accurately and at reduced costs.43
2.26 In 2015, the Committee for Economic Development of Australia (CEDA) delivered a report on Australia’s future workforce and identified that:44
… 40 per cent of jobs in Australia have a high probability of being susceptible to computerisation and automation in the next 10 to 15 years.
2.27 In a recent submission to the Senate’s Inquiry on the Future of Work and Workers, Flinders University reported that three of the 20 occupations most vulnerable to automation include accounting clerks, payroll clerks and bookkeepers.45 RPA allows businesses to refocus their resources to value-add activities such as the interpretation and analysis of data rather than calculating and generating reports. Examples of companies, known to tax professionals and already providing such services, include Thomson Reuters and Wolters Kluwer.46
2.28 RPA is also commonly used in reconciliations and report generation where tasks are rules based. It can bring a multitude of opportunities through the expansion of service offerings. For example, PwC Australia offers a suite of RPA related services including:47
strategic design to incorporate RPA into an organisation’s strategy, operating model, information technology (IT), workforce and risk;
opportunity assessment to consider how RPA can benefit an organisation beyond cost reduction, such as improving customer experience, revenue growth, risk mitigation and operational agility;
deployment of RPA; and
providing sustainability options such as ongoing support.
2.29 The effects of RPA are also being felt more widely as well. In 2015, ANZ spoke to the Australian Financial Review (AFR) about the pilots it is running in the finance, human resources, payments and mortgage processing areas. In one example, ANZ explained that it was able to reduce the number of employees in the payments area from 40 down to 2. Whilst ANZ is not using RPA as a method of reducing staff numbers, it does acknowledge that the pace of recruitment has dropped significantly.48
2.30 Similar experiences with RPA have also been observed in international markets. For example, the Future [Inc] Report by Chartered Accountants Australia and New Zealand (CAANZ) and the New Zealand Institute of Economic Research has predicted that, in New Zealand, 46 per cent of all jobs will be at risk to automation in the next 20 years.49 Furthermore, it predicted that all roles with the accounting profession other than corporate treasurers and secretaries are at high risk of automation.50
2.31 The term Fintech refers to financial technologies applied to support or enable the delivery of financial services. Whilst the term was previously used to describe the technologies used by financial institutions themselves in the ‘back end’ of their businesses, it is increasingly used now to represent technologies disrupting traditional financial services, including mobile payments, money transfers, loans, fundraising, and asset management.51
2.32 Some of the more widely known examples of Fintech include:
PayPal and Alipay which are online payment platforms, accepting credit and debit cards as well as automatically converting currencies to enable users to purchase goods from remote areas and overseas;52
digital wallets including Apple Pay, Android Pay and Samsung Pay which allow bank customers to make payments with the tap of a smartphone or smart watch;53 and
TransferWise which streamlines international money transfers at a 90 per cent discount on traditional bank transfer fees.54
2.33 Fintech changes the way in which companies interact with their customers, bringing a range of positive impacts such as increased competition of technologies, a reduction in the prices that customers pay to transact and greater access to financial services.55
2.34 The Australian Government estimated that Fintech investment reached an US$20 billion globally in 2015.56 It recognises that developing Australia’s Fintech industry will ‘not only help drive expansion and growth in our financial exports, it will also deliver benefits to Australians through new services that create value or bring efficiencies’.57 As the Treasurer has stated:
FinTech is not an afterthought in Australia. It is front of centre in our national economic plan to boost jobs and growth; giving innovative businesses the encouragement and means to become leaders in a global marketplace where speed, simplicity and scale are non-negotiables.
… the Australian Government continues to respond to the rapid development of FinTech. We’re working constructively with industry leaders and regulators to ensure we provide every opportunity for FinTech firms to succeed.58
2.35 An international example of Fintech is WeChat, an instant messaging app used widely in China that also offers payment services. It is enabled on mobiles phones and can be used to transfer payments to other users as well as to make payments for services, almost everywhere in China, including for ordering taxis, at supermarkets and in hospitals.59 It purports to have hundreds of millions of users every day and is one of the most popular payment methods in China.60
2.36 A subset of Fintech is ‘Regtech’, otherwise known as regulatory technology,61 being the ‘use of new technologies to solve regulatory and compliance requirements more effectively and efficiently’.62 It has been reported that Regtech software is becoming increasingly popular due to regulatory reporting and privacy requirements necessitated by the large amounts of data companies are now collecting.63 It has the potential to help companies build a culture of compliance whilst reducing the associated costs.64
2.37 Robo-advice refers to digital financial advice that is provided to clients through a computer rather than by a traditional financial adviser. It uses algorithms and technology to generate financial advice based on the client’s information such as age, gender, income, assets, financial goals and risk tolerance.65 It is used widely around the world, in countries such as the United Kingdom (UK), the United States of America (USA), Canada, Estonia, Sweden and the Netherlands. For example, in many countries including the UK, Finland, the Netherlands and Sweden, ETFmatic manages a portfolio for each of their customers by buying and selling Exchange Traded Funds (ETF) on their behalf.66 Anyone is able to try a simulation account for free or open a real money portfolio in under five minutes using ETFmatic’s App.67
2.38 Robo-advice is considered a low-cost option for obtaining financial advice. It offers convenience but has potential to disrupt the financial services sector, particularly financial advisers. It can be accessed through a smart device ‘on the go’ at any time. In addition, as the advice is delivered by computers rather than traditional advisers, it is an option for people who cannot afford traditional advice, have smaller amounts to invest or only require simple advice.
2.39 It should be noted that the advice provided by Robo-advice is limited to one particular area at a time and does not necessarily take into account a client’s circumstances in a holistic sense. For example, if broader investment advice is required, the end product does not consider other factors such as debt management, super contributions, tax planning or impacts on Centrelink benefits. Furthermore, Robo-advice does not clarify a client’s goals or objectives nor does it account for changes in a client’s circumstances such as taking breaks from work or loss of income due to illness.68
2.40 Robo-advice has also given rise to regulatory concerns. In Australia, accountants are required to either hold an Australian Financial Services (AFS) licence or be a representative of a licensee to provide self-managed super fund (SMSF)-related services to their clients. The Australia Securities and Investments Commission (ASIC) recently reported that:69
… a number of accountants who have chosen to operate without an AFS licence authorisation have entered into arrangements with digital financial advice providers (or “robo-advisers”) to allow their clients to access digital advice about SMSFs.
These arrangements allow unlicensed accountants to continue to provide SMSF-related services to their clients, even where they need financial product advice.
Big data analytics
2.41 Big data analytics or Big Data, refers to large sets of data and the tools used to manage and analyse them. The term is also used to describe data sets that are:70
… so large (from terabytes to exabytes) and complex (from sensor to social media data) that they require advanced and unique data storage, management, analysis, and visualization technologies.
2.42 Big Data also comes in various formats such as texts, images, voices and videos and can include information such as the number of clicks on a particular advertisement.71 A significant amount of this data is generated by the ‘Internet of People’ and the ‘Internet of Things’. The ‘Internet of People’ enables people to communicate with each other in ways not anticipated previously, by connecting ‘various pools of talent, enabling continuous upskilling, boundaryless careers, access to work opportunities, income continuation solutions, and access to various other benefits’.72
2.43 The ‘Internet of Things’ is the concept of devices communicating with each other using the Internet.73 The Internet of Things offers the transmission of data in real time between all parties including businesses and government. It streamlines interactions resulting in increased convenience, efficiency and better quality information. An example of an application arising from the Internet of Things74 is the online cash register which records all transactions and feeds the recorded information directly to revenue agencies. This has the benefit of assisting with business record keeping and compliance obligations as well as providing revenue agencies with more accurate data in real time.75
2.44 In 2016, the World Economic Forum (WEF) conducted a survey which found that one of the top technological drivers of change in the future of jobs is processing power and Big Data.76 Within the tax profession, Big Data can have the effect of improving both management and financial accounting. For example, Big Data may be used to value intangible assets such as brand names through the real time measurement of customer satisfaction and trends in social media.77 Such valuations are important in many areas of taxation,78 for example transfer pricing.
2.45 Big Data can also be beneficial in audit and compliance work, particularly where it is conducted by external auditors which may be from the private sector or government agencies such as the ATO. It can improve the quality and relevance of audit evidence as a greater variety of data is available to allow a more thorough examination. It can also improve the overall analysis of audit data as ‘population’ (as distinct from sample) based audits are attainable, enabling greater analysis of trends, ratios and comparisons. By way of an example, Big Data can consider the relationship between financial statements and actual business organisations to identify potential red flags requiring closer examination.79
2.46 Internationally, Big Data is used by revenue agencies in countries such as Brazil and Russia to monitor Value-Added Tax (VAT) compliance. Chapter 3 provides more information in this regard.
2.47 Cloud technology utilises the internet to store resources, data and information on offsite servers accessible from multiple devices80 without the need to purchase the infrastructure which would otherwise be necessary to support such storage and data processing needs.81 The ability to access cloud applications through a web browser allows businesses to conduct work anywhere by using a computer, tablet or mobile device.
2.48 Cloud technology and cloud storage provides ready access to vast amounts of data, which allows for the real time automation or processing of tasks such as bookkeeping and reporting. This reduces the risk of errors as the need to exchange files manually is diminished, creating greater efficiency and more accurate lodgments.82
2.49 Furthermore, cloud technology may result in capital savings as businesses no longer need to purchase both hardware and software previously required. Instead, businesses pay for cloud ‘apps’ on a subscription basis.83 Traditional accounting and taxation related software companies such as Sage, MYOB and Reckon have adopted this technology and now offer cloud versions of their applications.84
2.50 Tax professionals across a wide spectrum, from small to large scale practices, have also adopted cloud based technology. In addition to reduced costs and improved access, there are major client service benefits. Cloud technology allows real time two-way access between the practitioner and their client through a common data source. A recent global research survey found that 67 per cent of accountants utilise cloud technology and 53 per cent have adopted a cloud-based practice management solution.85
2.51 Emerging technologies, such as cloud and RPA, provide opportunities for tax and accounting firms to offer new services. Ernst & Young (EY) recently developed a cloud-based program, ‘EY Catalyst’, to support and enhance manufacturing operations. It offers clients the ability to access an extensive global database of leading practices, training, analytics and tools to build capability. It allows users to track their development journey through a mobile app, providing eLearning modules and an online community forum to encourage interactions with others.86 These are new services, not just old services offered in a new way.
2.52 The trend towards pursuing a digital business strategy has resulted in the adoption of cloud technology by revenue authorities as well. For example, Her Majesty’s Revenue and Customs (HMRC) in the UK uses cloud technology to make available online secure digital tax accounts for taxpayers which enables them to see a complete financial picture of their tax affairs and manage all of their liabilities and entitlements in the one place.87
Application programming interface
2.53 Application Programming Interfaces (APIs) allow businesses to connect their software with other businesses as well as the ATO with data flowing in both directions.88 APIs are attached to software products, acting as a ‘translator between a user’s request inputs and the software’s understandable language’.89 If the ATO, for example, wished to enable external applications to interact with its systems or part thereof, it would provide APIs for the relevant interactions so that the third party developers can incorporate them into those applications.
2.54 In the Australian accounting environment, APIs may be used in the collection of information from point-of-sale (POS) transactions. POS applications such as Vend, Kounta and others collect data from a business’s sales for the day and transmits them directly into relevant accounting software. This effectively removes the need to conduct an end-of-day cash reconciliation.
2.55 APIs are also used by accountants in reporting work such as constructing graphs, tables and dashboards. It allows raw data to be drawn and fed directly from accounting software into the software that presents the data in the desired format. It has the benefit of automating low-value tasks such as copying and pasting data into Excel macros which can give rise to human errors thereby allowing accountants to focus on value-add services such as explaining reports to clients.90
2.56 In addition, APIs are being used in accounting software to act as a gateway to payment platforms such as PayPal or eWAY. In these instances, APIs allow companies to issue invoices through accounting software which can be paid by the customer via a link, to the payment platform, in an email. Once the payment is processed successfully by the payment platform, the transaction is automatically reconciled against the invoice in the sellers’ or suppliers’ accounting software. Once again, this has the benefit of eliminating low-value tasks such as reconciling payment against invoices and eliminates human error.91
2.57 Internationally, APIs are released to DSPs by several of the revenue authorities examined by the IGT including those of the UK, Canada, Estonia and New Zealand. These are discussed in more detail in the next chapter.
New Payments Platform
2.58 The New Payments Platform (NPP) is a result of the collaboration between the big 4 banks and 9 other financial institutions in response to the Real Time Payments Committee’s recommendation for industry to develop a real time payments clearing and settlement system for consumers, businesses and government.92 The NPP, and related services such as PayID and Osko by BPAY, were deployed during the course of this review.93
2.59 The NPP is a form of Fintech that enables real time clearing and settlement of payments. It allows for simplified payments through the use of a mobile number or email address rather than a BSB and account number. It also allows payments to include more information such as text or links to invoices and other documents.94
2.60 The NPP is designed to be more ‘data rich’ and transmit more information with transactions than is currently possible on the existing payment platform. Given this capability, it is likely that future applications may include the collection of Goods and Services Tax (GST) at source. This could be made possible through financial institutions employing software with AI capabilities that analyses the data attached to individual payments to identify the GST component. The GST could then be instantaneously transmitted to the ATO thereby hardwiring compliance for businesses and enhancing ATO verification and collection processes.
2.61 Furthermore, the financial institutions may also develop ‘overlay’ services which use the NPP’s data rich capabilities to deliver greater benefits to their clients. As yet, it is not known what kinds of ‘overlay’ services may be developed.
2.62 The NPP, whilst a unique Australian design, is similar to the UK’s Faster Payments system which also enables real time payments. It was launched in May 2008, with a total of 21 participants, such as financial institutions, directly connected and 1 billion immediate one-off payments processed in 2017.95
Other technological and system developments
2.63 Other relevant technological and system developments include advancements in e-invoicing and enterprise resource planning (ERP) systems.
2.64 Electronic-invoicing or e-invoicing is not a new concept, particularly in the large market. It has been available for decades in electronic data interchange form. This form was typically used by parties that traded frequently with each other who were required to agree to a standard and fulfil strict conditions.96 The e-invoicing system provides ‘open’ access and is more publicly available in new systems and apps with the ‘exchange of invoice related documents between a seller and a customer in an electronic format’ occurring more widely.97 The e-invoice is generated directly from the information in a supplier’s accounts receivable system or from a web-based form and sent to the buyer’s accounts payable system. It bypasses historical human intervention such as manual processing both at the supplier’s and buyer’s end.98
2.65 The use of e-invoicing is estimated to save the Australian economy $7.8 billion annually.99 It is said to be 60 to 80 per cent more efficient than traditional paper methods and allows businesses to transact seamlessly, reducing costs and processing times as well as eliminating processing errors.100 Clearly, there is potential to automate GST and VAT payment and returns at the point of sale. Such automation would effectively hard-wire compliance with tax obligations and minimise activities in the black economy.101
2.66 ERP systems are business management systems that control multiple functions and integrate businesses’ main activities to deliver time and resource efficiencies. Such functions include human resources (HR), inventory, sales and project management. ERP systems employ cloud technology to give online access, making it easier to set up and operate.102
2.67 An application of the improved data support in an ERP system environment is PwC’s Comply First Time, which is a one-stop platform solution to meet all indirect tax reporting requirements. The platform automates multiple compliance processes, such as BAS, GST accrual accounting, payroll tax and workers compensation. In addition to taxation matters, it also uses data feeds to create dashboards and visualisation reports103 to provide senior management with a holistic view of the performance of their businesses. ERPs have traditionally been thought of as expensive, complex systems as they relied on large upfront investment in infrastructure and implementation. However, as they are now cloud-based and use applications, the costs of deployment are considerably lower. This has facilitated their use by mid-sized and even smaller practitioners.104 Benefits of ERPs for these tax practitioners include being able to access detailed information faster, prepare customised dashboards for individuals and prepare key reports automatically.105
2.68 The introduction of e-invoicing and ERP software is disrupting the traditional employee requirements for both the provider and the recipient of such services. Generally, the focus of major firms has been to service the compliance needs of their clients, however, in certain areas such as GST compliance, the focus is becoming more directed at developing the software platforms required to achieve such outcomes.
|↑1||This review is undertaken pursuant to section 7(1)(d) of the Inspector-General of Taxation Act 2003 and the report is produced pursuant to section 7(1)(f) of the Inspector-General of Taxation Act 2003.|
|↑2||Inspector-General of Taxation (IGT), Review into the Australian Taxation Office’s services and support for tax practitioners (2015).|
|↑3||Terms of reference for the review were announced on 6 June 2017, a copy of which appears in Appendix 1.|
|↑4||In accordance with sub-section 8(5) of the Ombudsman Act 1976 which has effect by virtue of section 15 of the Inspector-General of Taxation Act 2003.|
|↑5||Klaus Schwab, The Fourth Industrial Revolution (2016) p 2.|
|↑6||Oliver Ralph, ‘Cost of car insurance to plunge with rise of driverless vehicles,’ Financial Times (28 June 2016) <https://www.ft.com>.|
|↑7||Richard Susskind and Daniel Susskind, The Future of the Professions – How Technology will Transform the Work of Human Experts (2015) p 88.|
|↑8||It should be noted, however, that the Tax Agent Services Act 2009 defines ‘registered tax practitioner’ as including tax agents, BAS agents and tax (financial) advisers.|
|↑9||Richard Tresch, Public Finance: A Normative Theory, 3rd ed. (Academic Press, 2014) pp 171 and 175.|
|↑10||Piergiorgio Valente, ‘Digital Revolution. Tax Revolution?’ (2018) 90(1) Tax Notes International, p 117.|
|↑11||Chartered Accountants Australia and New Zealand (CAANZ), The Regulator of 2030: Regulating our digital future (June 2017) p 10; Cameron Cooper, ‘5 ways accountants have mastered AI’ (15 September 2016) Intheblack <https://www.intheblack.com>.|
|↑12||IBM, 101 Guide: Talking about Watson (undated), p 5 .|
|↑13||Suncorp, AI technology helps customers get back on the road sooner (1 November 2017) .|
|↑14||Steve Healey, The Future Professional (Paper presented at the Tax Institute 32nd National Convention, Adelaide, 16 March 2017) p 15.|
|↑15, ↑16||KPMG, KPMG invests in game-changing cognitive technologies for professional services (Media Release, 29 June 2016) <home.kpmg.com/au/en/home>.|
|↑17||H&R Block, Taxes will never be the same (undated) .|
|↑18||Ailira, About Ailira (undated) <www.ailira.com/about.html>.|
|↑19||Tax & Super Australia, Can AI deliver what tax practitioners need? (3 August 2017) <http://taxandsupernewsroom.com.au>.|
|↑20, ↑21||Vivek Wadhwa, ‘Don’t buy the hype: AI isn’t taking over decision-making’, Sydney Morning Herald, 19 March 2018.|
|↑22||Rachel Grimes, ‘The Changing Face of the Accountancy Profession’, Bloomberg BNA (28 September 2017) .|
|↑23||Maria Teresa Fabregas, ‘Blockchain technology: why does it matter for tax administrations?’ (2017) Disruptive Business Models, Intra-European Organisation of Tax Administrations, p 34; John Pavlus, ‘The World Bitcoin Created’ (2018) 318(1) Scientific American pp32-37.|
|↑24||Satoshi Nakamoto, Bitcoin: A Peer-to-Peer Electronic Cash System (31 October 2008) p 1.|
|↑25||Deloitte, Blockchain; Enigma. Paradox. Opportunity (2016) p 9.|