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					Atax UNSW   Personal Income Tax Reform Symposium April 2007         Paper 13




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                                                                   13

                      Tax refund versus tax return?


                                     Associate Professor Cynthia Coleman
                   Faculty of Economics and Business, University of Sydney




Coleman
Atax UNSW                  Personal Income Tax Reform Symposium April 2007             Paper 13




                           TAX REFUND VERSUS TAX RETURN?

                       ASSOCIATE PROFESSOR CYNTHIA COLEMAN
                   Faculty of Economics and Business, University of Sydney




            Assoc. Prof. Cynthia Coleman                 c.coleman@econ.usyd.edu.au




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                                         I       INTRODUCTION

The Australian Federal Income Tax has always been based on the concept that taxpayers are
required to lodge an annual return 1 . The amount of income tax paid depends on a taxpayer’s
taxable income. Taxable Income is calculated using the formula in s4-15 Income Tax
Assessment Act 1997(Cth):

           Taxable income = Assessable income – Deductions.

The main source of deductions for personal taxpayers consists of work related expenses. A
large percentage of personal taxpayers receive an annual refund cheque from the Australian
Taxation Office (ATO). This paper examines whether these taxpayers would prefer to forego
the compliance costs of filing an annual return in return for no longer receiving an annual
refund. Qualitative research conducted independently by the author since the early nineties,
and also by the ATO has consistently found that the concept of an annual return and the
hope of receiving a refund cheque is so engrained in the Australian psyche that an attempt to
abolish annual returns for these taxpayers would most likely encounter strong opposition and
require amendments to the law. Instead, the ATO is investigating alternative methods of
streamlining the system such as issuing Income Statements to taxpayers.


                                  II         HISTORICAL BACKGROUND

The Australian federal income tax has always been based on the concept that taxpayers file
an annual return. These returns were then checked by ATO officers to ensure that all income
was correctly reported and deductions correctly claimed. Taxpayers were legally obliged to
make a “full and true disclosure” of all relevant information to enable the ATO to assess their
          2
liability. There have been several High Court decisions regarding the meaning of “full and
                   3
true disclosure.” Commonly, assessors were given quotas and consequently in reality
individual returns did not receive close attention. The ATO prepared a notice of assessment
and despatched it to the taxpayer. Although taxpayers were aware that interest constituted
assessable income, many taxpayers would run the risk that the Commissioner would never
realise that they had not declared this income. However, technology has solved this problem
for the ATO.




1 Section 161(1) .Income Tax Assessment Act(1936) (Cth). The section provides: “Every person must, if required
by the Commissioner by notice published in the Gazette, give to the Commissioner a return for the year of
income within the period specified in the notice.”
2 Section 170(3) Income Tax Assessment Act 1936 (Cth) (since amended) imposed time limits on the
Commissioner’s power to amend assessments when the taxpayer had made a full and true disclosure.
3 Federal commissioner of Taxation v Westgarth (1950) 81 CLR 396 at 407; Australasian Jam Co Pty Ltd v
Federal Commissioner of Taxation (1943) 5 AITR 566 at 573 and Foster v Federal Commissioner of Taxation
1951 82 CLR 606 at 614.


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The ATO carried out a review into the assessment process and discovered:

   • the process was not cost effective;
   • the method of assessment did not have a deterrent effect in achieving compliance with
      the tax laws;
   • there was little job satisfaction for existing staff; and
   • the method of assessing did not cope adequately with expensive and protracted
      disputes. 4

In response to this review a system of self assessment for individual taxpayers was introduced
from 1 July 1986. 5 Taxpayers still lodge annual returns but these are accepted at face value.
The ATO continues to calculate amounts which are either refundable or payable and then
issues a notice of assessment. The staff of the ATO then audits a certain percentage of returns
and checks the information in the return. Provisions relating to substantiation of claims for
deductions also came into force on 1 July 2006. Division 900 Pt 5-30 and Division 28 Pt 2-5
ITAA 1997 set out in detail the requirements which must be met before individuals and
partnerships can deduct work expenses such as business and non business travel expenses,
and car expenses. Companies and trusts are not subject to the substantiation provisions.
Before the substantiation provisions apply taxpayers must satisfy all the technical
requirements for deductibility. 6

Full self assessment was introduced in 1992 in the Taxation Laws Amendment (Self
Assessment) Act. 7 In recognition of the reality that self assessment had transferred the burden
of ensuring technical accuracy in tax returns from the ATO to the taxpayer, this Act
introduced measures to assist taxpayers to comply, such as the system of binding public
rulings, (which now includes product rulings and class rulings), private rulings, oral rulings
for “simple” enquiries, and the provision of other administrative assistance to taxpayers.
These administrative measures include practice statements, interpretative decisions and
taxpayer alerts where the ATO has identified a practice which it finds unacceptable and
which it intends to introduce litigation to pre-empt. Following the Treasury Report on
Aspects of Income Tax Self-Assessment (ROSA) the system of self assessment was amended
with effect from the 2004-2005 income year. The purpose of the review was to assess
whether there was a correct and fair balance between the rights of taxpayers and the
necessity of protecting the revenue for the benefit of the Australian community.


                          III      PROBLEMS WITH THE CURRENT SYSTEM

In Australia the criteria for evaluating tax reform measures stems from Adam Smith. 8 He
suggested four principles of tax design:


4 T. Boucher (Commissioner of Taxation), “Self Assessment of Income Tax” (1986) Volume 3, No. 1 Australian
Tax Forum at 45-53.
5 Taxation Laws Amendment Act 1986 (Cth).
6 The section dealing with deductibility of work related expenses is section 8-1 Income Tax Assessment Act
1997 (Cth). See AAT Case 5501 (1989) 21 ATR 3037.
7 Taxation Laws Amendment (Self Assessment) Act 1992 (Cth).
8 A. Smith. (1958) The Wealth of Nations, Vol. 2, JM Dent and Sons Ltd, London at 307.


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           1. tax contributions should be in proportion to the taxpayer’s ability to pay;
           2. taxes should be certain not arbitrary;
           3. taxes should be levied at a time and in a manner which best suits a taxpayer’s
           convenience; and
           4. tax revenue should not exceed what is required for government expenditure.

These principles were discussed and adapted by the Taxation Review Committee in its Full
Report (Asprey Report) in 1975. 9 The Committee discussed the qualities possessed by a good
tax system. These are:

   • fairness or equity, which is further subdivided into “horizontal equity” and “vertical
     equity”;
   • simplicity, which encompasses administrative and compliance costs; and
   • efficiency which ideally encompasses neutrality.

The Report noted 10 that although these objectives were the three dominant tests of merit for
individual taxes there were others, for example flexibility to promote economic growth and
political acceptability. The current Australian tax system strives to meet these criteria, but
current commercial decisions, the focus on maximising revenue and the increasing
interaction of the Tax Act with the welfare system mean that simplicity is no longer
achievable.


                                IV      PERSONAL INCOME TAX ISSUES

Australia, because it has a system of withholding from employees (currently known as the
Pay As You Go system), has always relied heavily on personal income tax as a revenue
source. These taxpayers have very little opportunity to minimise their tax burden, which
affects their attitude to the tax system generally and at times their compliance. In 2001,
personal taxation accounted for 40.2 per cent of total revenue. The Organisation for
Economic Development’s (OECD) average was 26.5 per cent. 11

Compliance costs in relation to the annual filing of returns by personal taxpayers are a
burden on both taxpayers and the ATO. The only far reaching enquiry into compliance costs
incurred by personal taxpayers was undertaken by Evans et al. in 1997 and related to the
1994-1995 year of income. 12 That report estimated that personal taxpayer compliance costs
for the designated income year were about $4 for every $100 revenue, amounting to $1.5


9 Taxation Review Committee Full Report 31 January 1975 (Asprey Report), Australian Government Publishing
Service, Canberra.
10 Ibid. at 17.
11 Australian Bureau of Statistics, Australia Year Book 2004, ABS, Canberra, Table 27.16., as discussed in C.
Evans, “Diminishing Returns: The case for reduced annual filing for personal income taxpayers in Australia.”
(2004) Vol. 33 (No. 3) Australian Tax Review 168 at 170.
12 C. Evans, K. Ritchie, B. Tran-Nam and M. Walpole. A Report into Taxpayer Costs of Compliance (AGPS,
Canberra, 1997). Discussed in C. Evans, “Diminishing Returns: The case for reduced annual filing for personal
income taxpayers in Australia.” (2004) Vol. 33 (No. 3) Australian Tax Review 168 at 170.


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billion. There has been no further research on this area since 1997, but as a result of the
many subsequent reforms, it is highly probable that compliance costs have increased.
Personal taxpayers have large compliance costs, which are caused by the necessity of filing
an annual return. Self assessment has increased this burden. In his report on self assessment
the Inspector-General of Taxation noted:

          The PAYG taxpayer with a single source salary, bank interest and several deductions is
          required to consider as many as 110 boxes and to navigate their way through up to 130 pages
          of supporting documentation to complete their tax affairs. If that taxpayer invests in a
          managed fund, this complexity may be expanded by a further 166 boxes and an additional 70
          pages of documentation. 13

As a result of the complexity of the taxation legislation and the attendant compliance costs
comprising taxpayers’ own labour, staff costs, external advisers, overhead costs 14 and
psychological costs (i.e. negative experiences such as anxiety and frustration) 15 , many
                                                           16
taxpayers use an external adviser to prepare their return. In 2000-2001 12 million returns
were lodged. Of these, 10.3 million, comprising 86 per cent, were individual returns. 17

The current system imposes many costs on the ATO. With current technology it is possible
for it to receive from third parties a lot of the information which it previously relied on
taxpayers to supply. This includes information about salary and wages, interest income,
dividends and franking credits, charitable donations and Medicare information. A lot of the
complexity in the current system is caused by the interaction of welfare benefits with the tax
        18
system. These benefits include the Family Tax Benefits (FTB-A and FTB-B). They are usually
paid directly to recipients by Centrelink but the ATO checks in the annual return that the
correct amount has been paid. In 2005 and 2006 the Federal government was embarrassed
when it was revealed that some taxpayers had been overpaid, but they had not realised this
because they had not been given a statement of the amount they had been paid by
Centrelink and they had no means of repaying the excess. The government was forced to
write off the debts, and the average amount of each debt was between $300 and $600.

The Higher Education Contribution Scheme is also administered by the ATO. There are many
tax offsets or rebates which currently can only be claimed through the tax system, using the
mechanism of the annual return. These include the baby bonus, dependant rebates, low




13 Inspector-General of Taxation of the Commonwealth of Australia, Issues Paper No 3: Self Assessment, AGPS,
Canberra, 2003 at 18. Discussed in C. Evans, op. cit. 11 and 12.
14 C. Evans et al. Op. cit. 12.
15 R. Woellner, C. Coleman, M. McKerchar, M. Walpole and J. Zetler. (2005) “Identifying the Psychological
Costs of Tax Compliance” in Global Challenges in tax Administration, ed. R. Fisher and M. Walpole, Fiscal
Publications.
16 In 2000-2001, 76 per cent of individual Australian taxpayers who were liable to pay income tax used the
services of a tax adviser. The percentage increased to 88 per cent when there was also capital gains tax liability.
Discussed in C. Evans op. cit. at 11 and 12.
17 Commonwealth of Australia, (2003), Taxation Statistics 2000-20001, at 6.
18 R. Krever, “Taming Complexity in Australian Income Tax”, (2003) Vol. 23, Sydney Law Review 467-505, at
488.


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income rebates, the medical expenses rebate, and the senior Australians tax offset. In the tax
                                                              19
year 2004-2005 these welfare payments amounted to $6 billion.

In February 2007, Treasury released the 2006 Tax Expenditures Statement. This provides
details of almost 270 tax expenditures. Total tax expenditures in 2005-2006 are estimated to
be about $42 billion. This is expected to increase to about $52.7 billion in 2009-2010 as a
result of the changes to superannuation. Tax expenditures as a proportion of GDP were 4.4
per cent. This is expected to fall to 4 per cent in 2006-2007 because of the impact of the
personal income tax rate reductions. It is projected to increase to 4.5 per cent by 2009-2010
because of the changes to taxation of superannuation.


                                  V       WORK RELATED EXPENSES

The deductibility of work related expenses is an additional compliance burden for taxpayers.
Substantiation requirements are quite onerous and qualitative research has revealed that this
is often the factor which prompts them to use the services of a tax adviser. From the ATO’s
perspective the problem is that taxpayers will claim work related deductions which they are
not entitled to, or for which they have no supporting documentary evidence, or even for
which an employer has already reimbursed them.
Significant amounts of income deductions are claimed each year by personal taxpayers.
Almost eleven million individuals lodged a return for the 2004-2005 income year, 79 per
cent received a refund and 6.8 million individuals claimed $10.7 billion in work related
expense deductions. The average claim was $1,500, but taxpayers earning over $100,000
claimed $4,000. The greatest benefit is received by low and middle income earners as their
deductions represent 7.2 per cent of taxable income, compared with 2.9 per cent for
taxpayers earning more than $60,000. The claims are growing at three times Gross Domestic
         20
Product.

To manage this problem, the ATO Compliance Strategy consists of a balance of education
and audit. For the last six years the ATO has issued an annual Compliance Program to inform
the public of its plans for the coming year and the areas in which it intends to concentrate its
audit teams. In January 2007 it issued a document entitled “Making it Easier to Comply – the
easier, cheaper and more personalised program.” These documents are to encourage
taxpayers to interact with the ATO and assist them to deal with a complex system. The ATO
also uses statistical computer analysis to identify taxpayers or clients of particular tax agents
with a higher than “normal” level of deductions to assist it to select audit targets. It is
impossible for the ATO to audit every taxpayer so risk assessment is used. All these
techniques are assisted by technology which enables data matching to verify information
supplied by taxpayers.




19 M. Dirkis, “Radical (long term) strategic improvements in tax system productivity and simplification”,
Australian Tax Research Foundation Tax Leaders Forum, Canberra, 5 December 2005, Session 3, 16-20 at 18.
20 Ibid.


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                         VI      TAX PAYER ATTITUDES AND BEHAVIOUR

All tax systems are largely reliant on voluntary compliance. 21 Since the mid nineties the
author has conducted qualitative research investigating taxpayers’ knowledge of the tax
system and their attitude towards it. The focus of the research was whether a negative
attitude could be changed, leading to more compliant behaviour and ideally less
participation in the cash economy.

When interviewing taxpayers or running focus groups with them there is always a great
diversity of opinion and attitudes towards the tax system, compliance issues, the ATO and
the possibility of tax reform. There is general agreement that the system was too complex and
“band aid solutions” were applied as problems were revealed, but there was no idea of how
to fix it. Some taxpayers were aware that employees in the United Kingdom did not need to
lodge an annual return, but whenever the suggestion was raised for Australia there was
almost universal support for the concept of receiving a refund. Most taxpayers used an
adviser, some used a “shop front” franchise, and the main motive for doing so was to
minimise tax and obtain a refund. One taxpayer said “My guy’s a crook (interjection by
another participant “no, a game player”). What he comes up with is magic”. One 35 year old
still remembered the annual tax refund cheque as a major family event, although the law had
changed so that she herself did not receive a large annual refund. Other motives for using an
adviser included outsourcing compliance costs (described as not wanting the hassle of
lodging their own return), ensuring their affairs were in order and would withstand an audit
(particularly small business taxpayers), and complaints that wealthy people paid no tax.
Welfare payments are a particular source of annoyance. Most taxpayers feel they work hard
and welfare is too easily obtained. They did not resent welfare payments to the truly needy,
                              22
but did resent welfare fraud.

In the mid nineties the ATO in conjunction with professional bodies, including the Taxation
Institute of Australia, investigated the possibility of removing the necessity for individuals to
lodge annual returns. Neither of those bodies has any written record of the findings but the
people involved remember that it was regarded as too difficult because there were a number
of legislative barriers which would make the change difficult, including gift deductibility and
rebates such as zone rebates. At this time imputation credits were not refundable and Family
Tax Benefits A and B were not part of the system. The removal of the requirement to lodge a
return would involve major changes to the tax base, however the Society for Certified
Practising Accountants and the Institute of Chartered Accountants are in favour of abolition
of annual filing for personal taxpayers. 23

In 2000 the ATO released a video entitled “Towards the New Millennium: A Benchmark for
Tax Administration”. It is narrated by the present Commissioner of Taxation Michael

21 C. Coleman and L. Freeman. “The use of marketing strategies to improve levels of voluntary compliance in
the small business sector.” (1994) 11 Australian Tax Forum 347-67; C. Coleman and L. Freeman. “Cultural
foundations of taxpayer attitudes to voluntary compliance.” (1997) 13 Australian Tax Forum 311-36; C.
Coleman and M. Wilkins. “How do you want to play-honest?” Chapter 22 (255-264) in Taxation Administration
in the 21st Century, ed. M. Walpole and C. Evans, Prospect, 2001.
22 C. Coleman and M. Wilkins. Op. cit. 21 at page 59.
23 CPA Australia (2004). “Reforming Australia’s Personal Tax System—A Model for the Future” - Discussion
Paper. Melbourne, ICAA.


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d’Ascenzo. It contains a segment of historical footage from the sixties showing taxpayers
filling in returns and posting them to the ATO, where rooms of assessors processed them
(often simply by checking that a box was correctly filled in). At the end of the scene a
taxpayer is pictured at his letterbox opening his refund cheque. The camera then focuses on
Michael d’Ascenzo, who smiles at the camera and says “another satisfied taxpayer”. This
further emphasises that the perception is that the purpose of filing an annual return is to
obtain a refund of overpaid tax.

In 2000 the ATO commissioned research to investigate the issue as part of its Simplifying
Personal Income Tax Project. 24 The executive summary stated that :the main aims of the
research and consultation process were:

   • to explore taxpayer views about the current tax system;
   • to gauge community reactions to a number of ideas for simplifying the current tax
     system; and
   • to provide an opportunity for individuals to express ideas and make suggestions
     regarding the future development of the personal income tax system.

More specifically, the research examined the following issues:

   • knowledge of the personal income tax system;
   •  views on completing returns (how the taxpayer feels about completing a return);
   •  expectations of refunds and debits;
   • the importance of a tax refund in annual finances;
   • whether the community understands the use of a tax system to deliver non-tax benefits;
   • the extent to which the public trust the ATO to process their return correctly;
   • whether people’s tax affairs change from year to year and the effect of these changes on
     future tax affairs;
   • knowledge of deductions and rebates; and
   • views on how the tax system should be changed.

The four ATO/Government concepts for simplification tested in the community consultations
were:

   • Optional Return;
   • Change Only Return;
   • Family Return; and
   • Income Statement.

In addition, because the ATO was in the midst of developing the systems for sending tax
return data over the telephone, a Tele-filing Return proposal was tested.

A qualitative research methodology in the form of extended focus group discussions was
adopted. In two stages of community consultation, 40 focus groups were held with a total of


24 F. Pedic, M. Stewart-Weeks, G. Rutherford, A. Ezrakhovich. “Simplifying Personal Income Tax: A Report on
Forty Community Consultations”. Project No. 016, June 2000.


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368 PAYE wage and salary earners. Taxpayers were recruited and separated on five
variables:

   •      whether or not they used a tax professional to do their tax return;
   •      the level of complexity of their tax affairs (i.e. simple versus complex);
   •      age (18-24, 25-34, 35-44, 45-54, 55+);
   •      personal income (low, medium or high); and
   •      location (metropolitan, rural or remote).


                                            VII     FINDINGS

The findings were consistent with previous research into the same areas conducted by a
range of researchers. Four main issues were identified: fairness, simplicity, control and
choice.

                                             1       Fairness

Fairness was the extent to which taxpayers felt the system and any proposed changes were
fair to them. Specific issues raised were the ability to claim the appropriate level of allowable
deductions and the fact that everyone should be treated equally. There was a perception that
wealthy people had access to more loopholes and were treated less severely than other
categories of taxpayer.

                                            2       Simplicity

Simplicity was the desire to be able to understand the system and ideally be able to do their
own return. The main reason for using the services of an adviser was to ensure they claimed
all relevant and legitimate deductions. TaxPack was criticised for its complexity and the fact
that it had increased in length exponentially. This led taxpayers to assume that the
complexity of the system had increased. If the tax system were simpler taxpayers would feel
more in control.

                                             3        Control

Control was often raised as an issue because taxpayers felt that they had lost control over
their own tax affairs. In many cases their solution was to hand control over to their adviser.
Although most realised that they are liable for the details in their tax return when they sign it,
they do not fully understand what they are signing.

                                                4     Choice

Choice as an issue had not occurred to many taxpayers. Most participants in the research
regarded the tax system as inflexible and lacking any degree of choice as to whether or not to
lodge a tax return each year. Taxpayers felt that choice would offer them a measure of
control. If they were given the option of non lodgement of an annual return, they felt that this
would give them more control over their tax affairs. Most taxpayers did not realise that
choice adds complexity and is incompatible with simplicity, because taxpayers as customers


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are used to having a wide range of choice. It is easier for taxpayers to complain about what
is wrong with the system, and how unfairly it treats them rather than to think of constructive
ideas for improvement.

The conclusion of the research was that any changes to the tax system should incorporate
these features (fairness, simplicity, control and choice) so that taxpayers have some degree of
comfort with their role within and understanding of the system. This was not the case at the
time the research was conducted. The conclusion of the majority was that the Income
Statement concept was the only option which could combine the four desired features of a
personal income tax system. However, although there was support for Income Statements
taxpayers still felt that the ATO would benefit more than taxpayers would if the system were
introduced.

Taxpayers had reasonable knowledge of the mechanics of the system but were very confused
by some of the language, especially the concept of rebates. Not many taxpayers who
received rebates appreciated the level of financial support from the government.

Taxpayers did not enjoy the hassle of having to file an annual return, but most     took it very
seriously. They regarded it as their one chance to recoup “their” money from        the system.
Surprisingly, young people with part time employment, multiple jobs                  and study
commitments found there was more complexity in the system than would                 have been
expected. 25

A major finding of the Report was that for most taxpayers, refunds are the key element of the
personal tax system. Maximising one’s deductions is the only thing that makes the system
“work” for ordinary PAYE taxpayers because it is the way they are able maximise their
refund. Certainly, a personal income tax system without refunds would be unpopular.
Individual taxpayers are keen to preserve access to refunds because it helps them to preserve
a sense of control and a feeling that they at least have a chance to get their “fair share” back
in the form of a refund. Typically, when a refund was received it was used by the taxpayer to
pay current bills or to fund a small treat. Taxpayers who were over 55 remembered that
when they were young refunds were larger and were relied on for major family purchases
such as whitegoods.



                                 VIII     CURRENT FINDINGS


Qualitative research was conducted over the three month period from December 2006 to
February 2007. Several focus groups of people aged less than 24, many of whom were
students and none of whom possessed specialised tax knowledge, were conducted. In
addition, 25 in-depth interviews were conducted. Three interview subjects were professional
tax advisers, one of whom worked for a “shop front” franchise. The main issue was whether
taxpayers would prefer to forego a refund in return for the convenience of not needing to
lodge an annual tax return. It was explained that if the system changed there would probably

25 Ibid.


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be trade-offs such as the incorporation in the system of a standard amount of deduction as
compensation for the loss of a refund. The younger people mainly received small refunds,
but the older ones often received around $1000. Some had been required to pay tax. One
had made a genuine mistake in not declaring interest and was irritated that she was still
charged interest because she had an impeccable compliance record.

Although the participants were superficially attracted to the concept of not needing to lodge
a return, virtually everyone decided that they would prefer to stay with the current system
after thinking about the concept further. Many participants independently used the word
“control” in relation to that decision. Many were at the stage of having reasonably
straightforward tax issues. A lot used TaxPack and were happier with it than the taxpayers
quoted in the ATO Report. Although this may have been because a large number of them
were tertiary students and used to reading technical material, other non-students in that age
group did not have negative attitudes to TaxPack.

Most taxpayers used electronic lodgement, even the older ones. The majority were
“shoebox” taxpayers who kept receipts and sorted them annually. Those who belonged to
professional or industry associations used and appreciated any material such as check lists
supplied by those associations either because they were self preparers or because they were
supplying their tax adviser with the most accurate information they could. Some
acknowledged that it was not always feasible to obtain receipts but in those circumstances
they relied on an estimate even though they were aware that was technically in breach of the
substantiation legislation.

Occasionally, after many years of being self preparers, some taxpayers had switched to using
an adviser. This was often caused by a change in circumstances such as receipt of a new
type of income, e.g. royalties, capital gains, or income from a post retirement part time job.

The theme that the ATO pursues little people and does not attack high income earners was
also raised. When taxpayers were asked about their attitude to Operation Wickenby,
surprisingly few of them had followed it regularly in the media.

The professional advisers acknowledged that taxpayers had the expectation of receiving a
larger refund if they used the services of a professional. Other motives were the ability to take
advantage of later lodgement times, and the security of being more technically accurate.

The individuals who received larger refunds ($1000 or more) acknowledged that the refund
was only overpaid tax, and although economically it was not fiscally sensible, they were
used to the system, and they enjoyed receiving a “bonus”. Evans notes 26 that the concept of
lodging an annual return to receive a saving or windfall is enshrined in Australian culture.
Although it is financially irrational, Australian taxpayers of all ages still prefer to maintain the
system because, regardless of the size of their refund, they see it as giving them a measure of
control over their tax affairs, even if that control consists of choosing to use the services of a
tax agent. Evans suggests that taxpayers might accept a change if headline rates of tax were
significantly reduced. Australia does not have a history of low rates for personal taxpayers
and the taxpayers who would be removed from the system lack the ability to use structures

26 Op. cit. 12 at page 179.


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such as companies. The workforce is also changing as more individuals are becoming
independent contractors.

Dirkis 27 notes that the total amount of refunds to personal taxpayers is evidence of a high
level of churn in the system. His view is that using Income Statements (also known as pre-
populated returns in Scandinavia) merely masks the complexity with an administrative
solution. The ATO is currently trialling Income Statements for personal taxpayers by
supplying them with pre-prepared returns listing their income, and any payments from
bodies such as Centrelink. Taxpayers are already used to receiving this type of information
from financial institutions, they have the ability to know and check on the information the
ATO has in relation to their affairs, and both parties would benefit from the saving of time. A
major risk for taxpayers is the feeling of loss of control and the fact that there is probably less
security in the electronic records of organisations like Centrelink than there is in the ATO.



                                         IX      CONCLUSION

The focus of this paper is whether Australian taxpayers would prefer to reduce or eliminate
their compliance costs by losing the obligation of lodging an annual return in return for
giving up the ability to receive a potential refund, mainly by claiming deductions for work
related expenses. Problems involved in adopting this system, such as the interaction of the
tax system with many welfare benefits, are noted but not analysed in detail. The research
findings have been consistent for almost 30 years: deductions are the lynch pin of the
system, because they give taxpayers a sense of personal control and a feeling that they have
access to equity in the tax system, even when the fiscal naivety of overpaying in order to
save is explained to them. Complexity or the perception of it has been a feature of Australian
tax for so long that there is total resistance to the introduction of 28 such a fundamental
change.




27 Op. cit. 19.
28 The Commissioner’s Annual Report in 1946 alluded to the fact the system was too hard and that taxpayers
were having trouble dealing with the forms.


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