AI could provide opportunity to 'redesign' tax system, says Hirschhorn

ATO second commissioner, compliance and engagement group, Jeremy Hirschhorn, has outlined what Australia's future tax system may look like, given some of the recent macro trends in tax administration.

Speaking at a recent Tax Institute event, Hirschhorn said the ATO continues to move closer to the OECD Tax Administration 3.0 model, which holds that tax reporting and tax payment should occur as close as possible to the underlying economic event.

"The ambition is to move away from lagged systems and periodic reconciliation and instead move tax administration closer to where the data already sits, within the natural systems used by businesses and taxpayers," he said.

"Done well, that can dramatically simplify administration, increase compliance, and make life easier for taxpayers."

One important consideration in thinking about the future of the tax system, Hirschhorn said, is determining what the natural systems are for different groups of taxpayers.

"For many small businesses, it may be accounting software. For others, it may be payment systems or payment platforms. In some cases, particularly relevant to this industry, it may be banks and financial institutions," he said.

"One of the realities we’re grappling with at the moment is that we don’t yet know where those natural systems will finally settle."

Technology changes, such as AI, would be another important trend shaping the system's direction, he said.

"Sophisticated technology, including AI, may allow us to hide, or at least manage, underlying complexity. The example I often use is the smart phone. It’s probably one of the most complex pieces of technology ever created, but it’s simple to use. The complexity hasn’t disappeared, it’s just been designed out of the user experience," he said.

"That’s a useful way to think about where tax administration is heading. Rather than asking how technology, data and analytics can support the existing tax system, the better question is how they allow us to redesign the system itself."

Hirschhorn said in the future the tax system will increasingly "cut with the grain of business activity and embed itself into the natural flow of commercial activity".

"That’s where our focus increasingly sits."

Hirschhorn also said that data-sharing will likely continue to expand, given the opportunities to address both bad actors and also provide benefits for citizens.

He gave an example of how home buyers are currently required to aggregate their own information (including tax history), provide it to their mortgage broker or financial institution, who then determines whether the data is complete, consistent and high quality.

"The question here is: is there scope for the ATO to develop a set of standardised, curated data sets that are relevant for major financial product decisions, which the financial system could obtain from us, with the individual’s consent?"

"We already see this working overseas. In Norway, for example, there’s a standardised, mortgage-related data set that can be shared, and that has led to mortgage approvals being completed often within the same day."

Hirschhorn said tax instalments were one area of the system that didn't yet align with the OECD 3.0 principles.

"Those instalment systems were largely designed in the 1990s, and the amount you’re required to pay often bears very little resemblance to your actual profit for that month or quarter."

"What we do know is that the system produces very large wash-ups and refunds, which strongly suggests that instalments are not a particularly good proxy for underlying profitability."

"We also know that small businesses in particular find it very hard to understand and plan for instalments under the current system, creating disengagement."

Hirschhorn said the ATO was actively exploring, on an elective basis, the ability to base these instalments on current-period profitability rather than as a percentage of turnover, ideally within small businesses’ natural business software systems.

The tax system, he said, may also move towards either data-driven deductions or standard deductions.

"Do we get to a point where, to claim a deduction, there has to be a bank transfer behind it? And if that’s the case, are there then opportunities to use that data to pre-fill certain types of deductions as well? That’s one possible direction," he said.

"Another path might be a greater move towards standard deductions in one form or another. We’re already seeing indications of that, with the government’s policy of a flat $1000 work-related expense deduction for certain categories."