Saturday, May 26, 2007

Saturday Forum: At last - the half hour tax return!

The most important tax change announced in this year’s budget wasn’t the cut. We knew that was coming and by now we know the ritual. It was an unexpected (and relatively cheap) gift to the nation for which the Howard/Costello government will be thanked decades after this year’s few hundred dollars in tax cuts are long forgotten.

Andrew Leigh of the Australian National University illustrates the real problem most of us have with tax this way:

“Suppose that the Australian government decided that once a year, it would ask everyone to fill out a set of forms setting out their status. University students would be required to write down where they went to university, which courses they took, and who taught those courses. Anyone who had used medical services would have to tell the government which doctor they went to, and why. Anyone working for the government would have to fill out a form stating what job they did, and how much they earned. Veterans would have to tell the government what war they fought in, and for how many years. For the average person, the whole process would take eight hours, or a full working day."

Dr Leigh is of course describing the excruciating ritual of annually completing the Tax Pack in order to give the government information it mostly already has...

His article in the latest edition of the ANU magazine Agenda hugely understates the effort required.

The widely quoted estimate of 8.5 hours per taxpayer per year is now more than a decade old. It was obtained by surveying taxpayers in 1995 at a time when filling in the Tax Pack was comparatively simple.

Back then before the Howard government the Tax Pack didn’t ask about private health insurance or the earnings of the person you were married to, among many other things.

Even if obtaining the documents and filling in the Tax Pack still only took 8.5 hours per person per year, the total cost would be huge. Dr Leigh says that at current wage rates it would amount to $3.7 billion per year. (That’s about the cost of the tax cuts announced on budget night in the financial year ahead.)

It is a figure arrived at without attempting to cost frustration. But so anxiety provoking is the mere thought of having to fill out the tax form that an astonishing 70 per cent of Australians hire an agent to do it for us – the highest proportion in the world.

If we were freed from the burden we might appreciate it even more than a tax cut.

The Treasurer himself recognised this early.

Just two years after taking office in the lead-up to the new tax system he held out the prospect of an Australia free of income tax returns. He told the Business Council of Australia that if Australia "had a strong pay-as-you-earn tax system with a strong interest-withholding tax system, we could kick most Australians out of the necessity to file income tax returns".

Then he moved the idea to the backburner. The Tax Office had tested it with focus groups and found that people were worried that without the tax Pack they would not receive a tax refund. A Tax Office report concluded that: "For most taxpayers, refunds are what the personal tax system is all about."

And that’s where things stood publicly until this year’s budget.

Behind the scenes the Tax Office didn’t given up. Greg Dark, in charge of the co-called Change Program in the Tax Office noticed that whenever he spoke to tax payers and tax agents about the sort of change they would like to see from the Tax Office they talked about the anguish of filling in the Pack, and its computer equivalent e-Tax.

Surely it must be possible for the Tax Office to fill in most of the information itself? In earlier years, even in 1998 when the Treasurer Peter Costello first raised the prospect of an automatic tax return, it wouldn’t have been that easy. But advances in the ability of computers to talk to each other were making it easier all the time.

So quietly Greg Dark’s team began to fill in bits of the e-Tax computer tax return on taxpayer’s behalf.

Last year - with no fanfare - Centrelink data, and the interest payments made by a handful of banks were added to the forms that were presented to e-Tax payers on their screens.

This year – again with no special advertising budget and no extra publicity - all of the major banks and about 20 other financial institutions will put their interest payments up on the e-Tax screens.

As well one of the big commercial payroll providers will put up on the screens the information from 300,000 payments summaries (formerly known as group certificates), and a very small group of Australians will be able to access their Medicare details to automatically claim for excess expenses.

Also added will be the dividend information from the largest Australian share registries covering 90 per cent of Australian shares.

It is being kept relatively quiet because there is no guarantee that all of the information will be there for every taxpayer, and because it is a work in progress, something of a dress rehearsal.

The metaphorical opening night, in July 2008 will be grander.

Greg Dark expects to have pre-filled in on most e-Tax forms the payment summaries from all employers except those that are still using paper, interest information form every bank, dividend information from every share registry, and information from Medicare on our membership of private health funds.

Asked if there will be more down the track, Greg Dark says he is already planning it. He wants to use information from land-title registries to remind people when they have sold a property and might be liable for capital gains tax.

“This is some time in the future, not in the next couple of years. When real estate changes hands we will put a remainder in e-Tax just to flag it. It will say: ‘by the way, you sold this property’. And we are going to try to do that that with share registries as well and say: ‘did you remember, you sold these shares’, just to flag it for someone.”

PAYE taxpayers with straightforward circumstances using e-Tax should find every single piece of information they need already on their e-Tax screen.

The Assistant Treasurer Peter Dutton says when the system goes live mid-next year completing e-Tax should take less than one hour. And much of that time will involve logging on. The system will ask for your name, date of birth, tax file number, and as a security measure, the number of your previous tax assessment.

Even work-related deductions will become relatively straightforward. Greg Dark says from 2008 e-Tax will look up what you claimed last year and fill it in again.

“If you claim $50 a year for gifts and $100 for work boots, that’s what the system will present you with. You can change it if you want to, and then when you are happy click yes.”

Tax agents might perhaps have reason to be wary. But Greg Dark says he has spoken to them extensively and has hardly any complaints. They will have access to the software as well. The Minister Peter Dutton says he will still be using his tax agent, but expects the process to be quicker. He won’t need to bring in as many copies of documents.

If the prospect of the Tax Office and your tax agent having access to your medical and other records concerns you, Greg Dark says he understands those concerns. He still hasn’t worked through whether to allow tax agents access to their clients Medicare records.

He says the Medicare data won’t actually be in the hands of the tax office. “When you use e-Tax your machine will talk to the Medicare machine rather than a tax office machine which has the Medicare information on it,” he says.

But most of the data will be in the hands of the Tax Office, just as it is at the moment. The difference will be that from mid-next year users of e-Tax will have laid before them what the Tax Office already knows.

“It is a delicate balancing act, saying to someone would you like to see all the information we have collected on your behalf. It’s no secret that we have this information. What we will be doing is being upfront and saying, ‘this is what we know, here’s your opportunity to correct it’. Being caught out after the event is much less palatable than seeing it what we know when you first log on and saying – gee I’d forgotten about that account, that’s great”.

The Tax Office expects to spend $20 million on the program in the lead up to the system going live mid-next year. In the last two year’s it has spent $10 million. It’s shaping up to be the best value-for-money tax announcement Peter Costello ever made.