The Robert Gerard tax saga has raised questions
about the administration of the Tax Office. Taxpayers lodge their tax returns in the
knowledge that they will be treated fairly by the ATO. But is the tax playing
field an even one?

When Bob Fitton was asked what
gift he would like for his retirement after thirty five years working
as a
senior audit manager in the Australian Taxation Office, he requested a
cuckoo clock, “Every hour it can remind me of when I
worked for the Tax Commissioner.” Then he added this controversial jibe in his farewell
speech: “Finally I would like to apologize to all of those salary and
wage
earners who I have had dealings with as I do not think the ATO treats
you
fairly and equitably compared with the big end of town, small taxpayers
do not
get the write down on penalties that large companies get.”

Here was a long serving ATO auditor admitting
something we all had our suspicions about but could never quite prove: that
salary and wage earners were paying too much tax while the wealthy and powerful
got away with paying as little as possible.

The ATO
compliance program for 2005-06 was announced by Commissioner Michael Carmody a
few months a go. It had the usual ring
to it. Priority again seemed to be
directed towards individual taxpayers and small business. Teachers
and academics are again on the hit-list.
The construction
industry makes another appearance as well as the food preparation and
processing industries. New comers were dance, drama and music instructors.

Mr Carmody wrote to nearly four
hundred thousand individual taxpayers before they lodged their income
tax
returns this year to tell them about his concerns regarding the
claiming of tax
deductions. And eleven thousand audits are
planned for this segment. The same old target areas are mentioned. Work
related expenses, rental income and
deductions and capital gains tax. Compare that activity to the softly
softly approach in the large
business and international segment where Mr Carmody will undertake 185
audits.

Fitton earned a reputation for himself in the 80’s and 90’s with raids on big
accounting and legal firms (Greenwood Freehills and Allen Allen & Hemsley respectively)
chasing international tax avoidance. The raids led to subsequent court action
by the professional firms, which were won in the end by the ATO. The legal cases sparked by his investigations helped establish
broad powers for the tax office. Peter Haggstrom, former commonwealth tax
ombudsman (1995 – 1998), now Vice President (technical) Deutsche Bank, says: “The tax world will be a much greyer place
without him.”

Fitton has
weaved through many cases, such as the Griffith mafia (he sat in the royal
commission taking notes about the drug profiting), the bottom of the harbour
schemes era, brothel owners, SP bookmakers and international profit shifting of
large corporates taking him to various exotic tax havens around the world.

Fitton knew he was in trouble when he went for
a promotion interview. He was told by one of the interview committee
comprising senior executive audit personnel that: “You’ve rocked the boat with the accounting and legal professions and
that has not held you in good stead.”

And just prior to the start of the
annual desk audit season, one of his superiors told him: “Look Bob, forget about the big boys and concentrate on the bread and
butter stuff that brings the money in. Just make sure that nurses have the
receipts for their stockings and that salesmen have got their car diaries up to
date.”

With the Gerard affair now upon us, Fitton’s comments are sure to pour petrol on the fire of tax
equity. “It had concerned me for a while,”
Fitton said. “Every day we prosecute
small taxpayers for not lodging tax returns and we penalise and prosecute small
business people but in the last five years I had not seen any prosecutions of
the big end of town. It’s a gross injustice.”

Fitton said when dealing with the ATO, ordinary taxpayers might want to
take the lead of top company executives he’d met on the job.

“A. Lose everything, deny everything, admit nothing.

B. Blame your accountant.

C. If the top two don’t work, ring the Tax Commissioner.”

There has been a feeling among auditors at the coalface for a long time
that big companies wield too much power and influence with the senior levels of
the ATO hierarchy. “Deals” or “settlements” are done to reduce the amount of
tax and penalties payable after the completion of an audit. The problem is, say
the auditors, that the negotiation of the disputed figure is taken away from
the local case manager and the audit team, as the company and their
representatives take their case to Canberra.

That power and
influence includes having nosy auditors removed from audits as was the case
with Fitton in 2000 when, in a widely publicised spat, he was removed from the
audit of Daihatsu Australia
after KPMG partner Mr Stephen Breckenridge complained to the tax commissioner,
Michael Carmody about Fitton’s conduct. A subsequent internal investigation
into Fitton’s conduct run by an Assistant Commissioner in Canberra
established that Breckenridge had had eight
auditors removed from various audits he was involved in. That’s only one tax
advisor. One wonders why Mr Carmody did not expand his investigation to include
other influential tax advisors in the tax industry.

At the time, the acting Secretary of the Community and Public Sector
Union (tax division), Mr Michael Tull, said the practice of removing officers
from investigations after complaints from tax specialists and their corporate
clients was becoming more common.

“As soon as a big
taxpayer complains, particularly a big corporate client, the ATO seems to take
a case of guilty until proven innocent,” he said. “The whole question has been a substantial
issue during Michael Carmody’s rein.”

Fitton tells the story of one of the audits he was involved in where
half a million dollars in penalties was wiped off by his boss in Canberra.
The company complained to Carmody alleging that the senior officer from Canberra
would not negotiate with them a “settlement”. Shortly after, without any regard
to the facts of the case, and with one stroke of her pen, wiped over $500,000
off the penalty. “I’m Australian first, tax officer
second and as far as I’m concerned it was not right. The whole thing about
these settlements has to be looked at by someone independent,” said Fitton.

Leading Sydney
tax lawyer Robert Richards says: “‘Deals’
is a bad word. ‘Settlements’ is more accurate. What happens is
that the ATO will make settlements if it thinks it is far from certain it
will win a case. The more complex the matter the more likely this will be the
case. Less wealthy taxpayers affairs will by definition not be complicated
and as a consequence the less likely it is that there will be settlement
opportunities. The system of ‘deals’ does not work like that except that I
think as matter of strategy the ATO sometimes comes in with a high figure to
encourage taxpayers to do settlements.”

“I
have seen instances where the ATO has exaggerated tax payable by ten
fold clearly as a tactic of starting from a high point which will enable
it to negotiate down to what the ATO thinks is the
correct point. They are the “deals” you might hear about but
they are artificial in the first place.”

Fitton disagrees. “Whinge and win,”
he says. “I’ve seen too many cases
reduced just because the company has access to senior people so they can
whinge. And they were not reduced because of any technical point of law. We’re
not talking small change here. The reductions I’m talking about could build
more hospitals and schools. In my view the secrecy provisions of the tax act
are hiding gross deficiencies in the administration of tax law in this country.
At the moment the ATO is not accountable to Parliament for settling these large
corporate cases because the government cannot ask the ATO questions because of
the secrecy provisions and the potential for corruption is huge. We need to
have someone like the Auditor General or a bipartisan parliamentary committee
to review these settlements because the country is losing potentially billions
of dollars.”

Fitton also says that the propaganda coming out of the Commissioner’s
office about the big stick being applied to Corporate Australia is misleading. “Michael Carmody comes out with figures that
suggest he is screwing his fair share out of Corporate Australia and it all
sounds very impressive but what he doesn’t tell you, me and the Parliament is
how much he is giving away in “settlements.”

Perhaps the last word should go to Haggstrom, who is in a unique
position to assist the public and Parliament’s understanding of the issues by
revealing what went on in his position as the Howard government appointed
taxation ombudsman. “The big problem with
giving a balanced view of tax administration to the parliament and the public
is the secrecy provisions of the tax act.”

“One area I particularly wanted to
look at closely was settlements and we got a complaint that actually
demonstrated the flaws of the system. To say that the ATO was unenthusiastic
about having its settlement processes picked over is an understatement.
It had external Senior Counsel riding “shotgun” on the investigation,” says Haggstrom.

Haggstrom tried valiantly to make the settlement process more accountable
but it fell on deaf ears in all areas. “My
suggestion that videotaping of settlements be mandatory (at least for amounts
over a certain level) was not greeted warmly by the ATO or the tax industry. “

And in a swipe at the Howard government he declares: “Fundamentally I don’t think our politicians
really want to know what goes on – it is a bit like not wanting to know what
the chef did to the liver in the kitchen before it was served up to you.”

It is, of course, impossible for the ATO to check everyone’s return to
see whether they have been honest. The ATO Corporate Plan relies on what they
call voluntary compliance with the tax laws where they hope the vast majority
of taxpayers, big and small, will be honest and file correct tax returns.
Voluntary compliance is one of the pillars that support our tax system. It has
the potential to fall down like a pack of cards if one or more segments of the
market believe another is being treated differently or indeed favorably.

Associate Professor
Cynthia Coleman from Sydney
University
is one of Australia’s
leading academics in taxation law and research. Her research has indicated that
small business taxpayers justify not declaring their cash and overstating their
tax deductions by saying that big business don’t pay their fair share. “The most discouraging feature of recent
research is that the biggest area of mistrust in the Australian community is
between taxpayers themselves and whether other taxpayers are paying their fair
share of tax,” Coleman says. “While that perception may overstate the actual level of vertical
inequity, it nevertheless breeds mistrust of the tax system.”