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Imperfect Compliance: Digital Payments and Data Matching in Tax Disputes
Substantive Law| What area(s) of law does this episode consider? | Tax law, data-matching and cryptocurrency. |
| Why is this topic relevant? | The meteoric rise of cryptocurrency has caused difficulties for regulators the world over – especially regulators working in taxation such as the Australian Taxation Office (ATO). Developments in data-matching processes aim to increase the visibility of the ATO into taxable events in the digital payments space to permit the verification of information shared in a self-assessment. |
| What are the main points? |
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| What are the practical takeaways? |
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| Show notes | The ATO Practice Statement LA 2008/6 Fraud or evasion |
| David Turner: | Hello and welcome back to Hearsay the Legal Podcast, a professional development podcast for Australian lawyers and anyone else who’s interested in Australian law. I’m your host, David Turner. Hearsay the Legal Podcast is brought to you by Lext Australia. Lext is on a mission to improve the experience of getting legal advice and practising the law and Hearsay the Legal Podcast is improving your experience of CPD. This episode was recorded in person, and on this occasion David was unable to attend. My name is Ross and for this episode of Hearsay I will be your temporary host. |
| Ross Davis: 1:00 | The ubiquitous tax man has been around for a very long time. Some of the first recorded instances of taxation survives from ancient Egypt, where the Pharaoh is said to have taken a percentage of his subjects’ annual grain harvest. It likely comes as no surprise then that the largest individual component of government revenue in modern Australia comes from income tax. But the tax man of old looks very different to the tax man of today, and modern tax collection is less of a manual exercise and more of an exercise in data collection. While the Australian Taxation Office is unlikely to want a proportion of your grain harvest, they most definitely do want their proportion of your annual income. With new identity avoidant technologies like cryptocurrency throwing a wrench in the global taxation data machine, tax controversy is in the middle of a Renaissance. With me today to talk data matching, tax compliance and disputes is Andrew Davidson of Davidson Tax Law. Andrew, welcome to the podcast. |
| AndrewDavidson: | Thank you, Ross. |
| RD: 2:00 | Is it true to say there’s an asymmetry of information between the tax office and most taxpayers and that they usually know more about your finances than you do? |
| AD:
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4:00 | Information asymmetry; I love that phrase. Taxpayers can certainly be surprised by the pervasiveness of the ATO’s information gathering powers. More than once I’ve been involved in an audit where a taxpayer has been genuinely surprised that the ATO already have all of their bank statements before they’ve even gotten in touch to ask for them. The ATO can also conduct covert audits where they’ll quite deliberately look at all of your financial affairs without notice to you. This is the rub of it; the ATO don’t know as much about your finances as you do, and that’s the problem. They need to know enough to be satisfied that they have assessed you for the correct amount of tax. Where the ATO knows some, but not all, of your information and an audit or review is coming to an end this is certainly a scenario that can lead to poor outcomes. Remember, the ATO is required to assess you or assess the taxpayer on the information they have. TIP: The Australian Taxation Office, commonly known as the ATO, has extensive powers when it comes to tax issues. Most, if not all, Australians will have dealt with the tax office at some point in their lives. It’s headed by the Commissioner of Taxation – which is currently Chris Jordan. The Commissioner, who you will hear Andrew refer to throughout this episode, is broadly empowered to administer the tax laws of the Commonwealth and the ATO. If you’re interested in the powers of the Commissioner and the ATO more generally take a look at the Taxation Administration Act 1953 (Cth). For a taxpayer looking to understand the ATO and its mission, a good place to start is the Taxpayers’ Charter available on the ATO’s website. The Charter sets out how the ATO aspires to deal with Australian taxpayers. Generally, it provides that the tax office will treat taxpayers as being honest, and will provide them an opportunity to explain any discrepancies which might arise, it also states that the ATO will treat taxpayers with courtesy and respect and take into account personal circumstances when necessary. The Charter also provides that taxpayers may have someone deal with their tax affairs and with the ATO on their behalf. |
| AD: | An easy way to think about how this difference in information plays out in practice is where the ATO may see significant or repeated amounts hit your bank account and they want to know about these amounts. If you, as a taxpayer are not able to provide an explanation for these amounts, accounting records, statutory declarations, etc. Don’t be surprised if tax is levied on these amounts by the Commissioner. Records are critical. Contemporaneous records are really the thing that stands between very, very poor tax outcomes for taxpayers. |
| RD: | Andrew, what kinds of contemporaneous records would the tax office accept? |
| AD: 5:00 | Accounting records are first and foremost the most important records in tax. Statutory decorations, email, minutes of company meetings; these are all other very important types of records. The contemporaneous nature of records can’t be overstated, or the evidentiary value of contemporaneous records is critical. |
| RD: | I’d like to switch now to the onus of proof. In October 2021, the House of Reps Standing Committee on Tax and Revenue recommended that the government should shift the onus of proof to the ATO in relation to allegations of tax fraud or evasion. What would the practical impact of shifting the onus of proof be on taxpayers involved in a fraud or evasion dispute? |
| AD:
6:00 | The recommendation was to change the onus of proof after a period of time had elapsed equal to the relevant record retention requirement, which is five years. So that’s the first thing I’d say. The short answer is I think the practical impact of making an opinion of fraud or evasion by the Commissioner – and this is the making of the opinion – could be relatively limited. There have, however, been instances in the past where this might not necessarily have been the case. By contrast the impact of a taxpayer’s ability to seek review or appeal an opinion of fraud or evasion could be much more significant by making the opinion itself substantially more reviewable. To get to the long answer, amendment limitation periods are a critical part of the protection offered to compliant taxpayers. Conversely, unlimited amendment periods in instances where taxpayers have engaged in fraud or evasion are designed from a policy perspective as a deterrent. Evade tax and you’ll be left with a lifetime of worry as it were. |
| RD: | Nobody wants that. |
| AD:
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10:00 | Nobody wants that. And it’s designed to keep you up at night. A taxpayer will generally have an amendment window of two to four years from the date of their income tax assessment. Other taxes generally have their own but similar limitation periods. After that period of time has elapsed, the Commissioner lacks the power to amend a taxpayer’s assessment for that period in the absence of the Commissioner forming an opinion that fraud or evasion has occurred. Currently, an ATO officer of an EL2 or higher must personally form an opinion that fraud or evasion has occurred. TIP: Like in any organisation, the ATO has different levels of management. The acronym Andrew just used – EL2 – stands for Executive Level 2. This is the second highest level of management within the ATO, only below Senior Executive Services officers. As Andrew pointed out, ATO Practice Statement LA 2008/6 Fraud or evasionmandates that an officer of an EL2 classification or higher forms the opinion that there has been fraud or evasion. In forming such an opinion, the relevant officer is required to obtain advice from the ATO fraud and evasion panel before forming their opinion. The officer is also guided to obtain other appropriate specialist technical advice. Here’s where it gets interesting. Past reviews, including by the Inspector General of Taxation in 2011, the House Standing Committee on Tax and Revenue in 2015 and, more recently, the 2018-19 Commissioner of Taxation Annual Report as you know, have highlighted evidence, particularly in instances of alleged evasion where internal processes and procedures appear not to have functioned as designed. The 2015 report, for example, noted instances where the ATO had appeared not to follow its own administrative guidance by sending out proforma letters generated on the basis of Austrack information. These letters stated that the ATO had detected bank transfers outside the amendment period, and therefore form the opinion that evasion had occurred, and accordingly would amend the taxpayers income tax assessment well after they were otherwise allowed to do – this was all contained in a pro forma letter. So for those administrative law boffins out there, this should ring alarm bells. The ATO as a result of this, did undertake to improve training and compliance with its administrative guidance and I don’t have more recent examples of failure to follow process. So perhaps the issue is fixed. All of this means that changes could, assuming the ATO continue to follow its guidance in the future, have little practical effect in the Commissioner’s making of an opinion of fraud or evasion. The situation’s quite different in terms of a taxpayer seeking review of an appeal against an opinion of fraud or evasion. Current case law suggests the Commission’s opinion isn’t really reviewable as distinct from substantive assessments that flow from such an opinion. The taxpayer is instead left to fight the substantive assessments. And where they do that they bear the onus of proof to establish firstly that the assessment is excessive and, secondly, to demonstrate to the Commissioner what that assessment should have otherwise been. That’s a tough ask on a taxpayer. Getting back to seeking review or appealing an opinion, the taxpayer has to in effect disprove a negative, and they bear the onus of proof to do this. It’s a tall order. So legislating to shift the onus of proof to the Commissioner would allow the tribunal, the AAT, to reform the opinion of fraud or evasion, or to function in a way much more akin to a merits review forum. I think these changes would be significant and positive. |
| RD: | Talk us through a typical tax dispute. What kinds of clients are coming to you for help with their tax issues and what steps are commonly required to resolve their disputes? |
| AD: 11:00
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13:00 | A tax dispute is a dispute that involves tax and it is usually with a revenue authority in Australia. This is most commonly the Australian Taxation Office. Although in the case of the state based tax, it will be a state revenue authority. A dispute can arise in relation to the amount of tax payable. An example of this might be a dispute over how much tax is payable under an assessment, or it can arise over the status or characterisation of a taxpayer. An example of this is the ATO issuing a notice of noncompliance to a superannuation fund. My clients are individuals with relatively more complex tax affairs or business owners. We also assist generalist advisors where things get a bit too tax or dispute specific for their ordinary skill set. In terms of the stage of dispute, we get involved in – tax law is a lot like medicine prevention is a far better strategy than finding a cure. A lot of the work we’ve done to date has been early-stage. So this is before an assessment or an amended assessment is issued before a tax liability crystallises, or at the stage where the ATO wants to know more about a taxpayer’s tax affairs. We also do ad hoc or very niche advisory work. This is where a taxpayer wants quite specific advice about the application of the law to their future circumstances and they need to know pinch points for something that may sound quite simple initially, but where the consequences are significant if the law doesn’t operate as thought. TIP: As Andrew pointed out, tax law is notoriously technical and the legislative regimes at the state and federal level can be difficult to navigate even for experienced taxation practitioners. The consequences of misinterpreting a tax regime can be stark. In an earlier episode of Hearsay, barrister Oliver Berkmann took Hearsay Host David Turner through the concept of private rulings – which are broadly designed to clarify how things are meant to operate in relation to a specific taxpayer. In this particular extract, Oliver and David discuss how private rulings operate in the context of Revenue NSW. |
| DT: | Private rulings can be sought from the ATO at the Commonwealth level and from Revenue NSW at the state level. A private ruling is issued by the Chief Commissioner of State Revenue in response to requests by taxpayers, clients, or their representatives, seeking clarification on the interpretation of legislation for a specific situation encountered by that particular taxpayer. These rulings don’t have the force of law, but they’re issued to assist taxpayers in determining their tax liability or to clarify the interpretation of tax laws. As someone who’s had quite a bit to do with the private ruling process from both sides of the table I suppose, tell me a little bit about how that process gets started. When is it most appropriate to seek a private ruling? |
| OB:
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16:00 | Sure, so the purpose of a private ruling is to provide certainty, or I guess clarification, on a proposed transaction. It’s not there to make a decision or to give you an answer to a transaction that’s already been entered into. So for example if you, if you’re asking yourself ‘if I purchase this property how much stamp duty will I pay’ or ‘if I buy these shares will I be subject to landholder duty,’ in circumstances where you’re proposing to enter into a transaction, those types of scenarios might be suitable for a private ruling. If you have the situation where you’ve already executed certain documents, then that’s not a private ruling scenario. That’s a question of whether or not you’re liable for, for example, transfer duty on that transaction, not whether you will be liable for transfer duty on particular transactions. So the circumstances where you would look to ask for a private ruling or request a private ruling is particularly in circumstances where you have complex commercial transactions, and you want certainty as to whether or not entering into that transaction will result in a particular liability. So for example, like I mentioned before, landholder duty. So if you want to determine or work out essentially whether or not if you buy these shares or buy these units whether you would be liable for landholder duty, you can seek a private ruling. There are all types of private rules you can seek and essentially the process is before you enter into that transaction you lodge a private ruling online, they have online facilities now with Revenue NSW. As part of that process you need to sign a declaration that you’re providing, making a full and frank disclosure, that you’re providing all the details relevant to the proposed transactions along with all the relevant documentation. So if you’ve been dishonest or you haven’t made a full and frank disclosure or there’s other factors that came into play that the Chief Commissioner wasn’t aware of, then the private ruling will not have the force that you can rely on that you would ordinarily expect. So that is the process that you can request from the, from Revenue NSW. It’s been awhile since I was there but generally speaking it takes around 6 to 8 weeks in order to get an answer, might be a bit longer now, giving everything that’s going on, but you’re probably looking at a month and a half/two months to receive an answer. And from there you have some sort of certainty as to whether or not you would be liable for that. So another scenario that comes on, I’ll give you probably an example, is surcharge provisions, the amendments of your trust deeds. So a scenario where if you wanted to know whether your proposed amendments to your discretionary trustee would satisfy the legislation so as to not incur land tax surcharge or purchaser surcharge, that would be a scenario that you may want to look at in writing to the Chief Commissioner with the existing trust deed with your proposed amendments and seeking a private ruling as to whether those amendments would be sufficient in order to comply with legislation. |
| AD:
17:00 | I think it’s fair to say early engagement is usually a good idea. While disputes are by their nature bespoke, there are a number of aspects or steps that are common across most disputes. The first is understanding why a dispute has arisen or understanding the revenue authority position. Most of the time, this is easily discernible from their correspondence. There is always, however, a context. And I think this is always important to understand what’s the context the dispute has arisen in. The second part is understanding at a forensic level, the taxpayer’s factual circumstances, tax disputes are notoriously factually intensive and often involve highly technical subject matter, which can sit across a number of disciplines. The third part is putting your case forward. There are complex and significant differences between the different stages of dispute resolution with the ATO the earlier taxpayer, get their arguments in the better |
| RD:
18:00 | Now, Andrew, the ATO provides a public facing compliance model, which indicates its various compliance strategies in respect of the attitude of taxpayers involved in a dispute. For example, where a taxpayer’s attitude to compliance is that they’ve decided they’re not going to comply. The ATO’s compliance strategy is to use the full force of the law. Have you seen an example where a taxpayer’s attitude to compliance has influenced the enforcement behavior of the ATO? |
| AD: | Yes, I have. The ATO takes a taxpayer’s attitude towards their compliance very seriously. I think it’s important to take your tax obligation seriously and be seen by the ATO to take your tax obligation seriously. This is especially the case in a dispute and audit or some type of ATO compliance activity. I haven’t seen an example where an attitude of the type alluded to in your question has served any benefit to the taxpayer at all. |
| RD: | The ATO is basically saying if you come after us with full force, we’re going to come after you with full force. |
| AD: 19:00 | Yeah. I think the ATO is saying, if you make a conscious decision not to comply with your tax obligations or the tax laws that they’re tasked to administer, then they will use their very great and far-reaching powers to ensure that you do comply. And it will be expensive and somewhat painful, I imagine. |
| RD: | To take us back to the other end of the spectrum, Andrew. So if you are compliant with them in a dispute, what benefits do you get? |
| AD:
20:00 | Yeah, so the ATO have a vision for tax disputes in the future, which is that they are limited to where there is a genuine and honest disagreement over the application or interpretation of law or guidance. TIP: Recently, like much of Government, the ATO has been attempting to reinvent itself, aiming to transform how it goes about its core business to make it a contemporary and service-oriented organisation. This project is called ‘Reinventing the ATO’ and part of the project has been focussed on managing and resolving tax disputes in a way that is efficient, respectful and fair, such as by utilising alternative dispute resolution methods. In its program blueprint, the ATO reiterates its vision for a “collaborative” and “pragmatic” approach to tax dispute resolution. The taxman aims to use data matching processes to minimise resources being spent on instances of tax fraud, tax evasion, and genuine mistakes in self-assessments. Andrew will touch on data matching later in this episode, and we’ll leave a link to the ‘Reinventing the ATO’ program blueprint in the show notes. And these types of disputes do genuinely arise. I’ve seen an example where the order of the word “and”, and “the” flipped on its head to “the”, and “and” had an $80 million difference in tax. It’s quite extraordinary to think about, but it happens. |
| RD: | Wow. |
| AD: | Yeah. Yep $80 million… |
| RD: | over “and” and “the”… |
| AD: | …in one taxpayer’s case. |
| RD: | Incredible |
| AD: 21:00 | Getting back to tax attitudes, and compliance. This is another point at which I’ll raise the importance of early engagement. So taxpayer or generalist advisor alike, getting engaged with the ATO or a specialist at an early stage is nearly always a good idea. One of the reasons is because it signals to the ATO that you have a good attitude towards your compliance and you take your obligation seriously. Going back to – does a taxpayer have to agree with the ATO about everything? No, absolutely not. Many disputes feature genuine differences over an understanding of the factual circumstances of the taxpayer or the application or interpretation of relevant laws or guidance. Additionally, the ATO might get it wrong. An ATO officer might take a dislike to a particular taxpayer, but there are always options in this case and the ATO will always seek to be fair. |
| RD: 22:00 | You mentioned earlier that taxpayers know more than the ATO about their own finances, but the ATO needs to know that information. You recently published an article on the ATO and data matching in the digital payment space. Why is the ATO so interested in data matching? |
| AD: | Yeah, that’s right. Data matching is a tool that allows the ATO to verify taxpayer accuracy in their self-assessment. Remember we have a self-assessment regime for tax, so the taxpayer has to assess themselves. In practice, that means they provide information to the commissioner and the commissioner then issues you with a letter saying ‘based on your income tax return, I’ve assessed you for this amount of tax.’ So legally there’s a difference, but in practical terms, the taxpayer has to report to the tax authority. This is not the case in all countries like in Germany. There’s actually, from what I understand, an army of tax bureaucrats who go out and calculate your tax payable for you. |
| RD: | Interesting stuff. |
| AD: 23:00
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26:00 | Yeah, so, I mean, that sounds horrible actually, but there you go. Getting back to data matching. Data matching allows the ATO to verify taxpayer accuracy and in a self-assessment environment, it’s really important data matching has added a lot of capability to the ATO and hasn’t really changed the legislative powers that the ATO have nearly always had. The ATO has extensive information gathering powers, but data matching has allowed them to do more with those powers at a much lower cost. So lower-cost, larger scale. Effect, massive. Data matching isn’t totally new and we’ve seen other more generalised information sharing systems. A big one in about the last 10 years has been the Common Reporting Standard or CRS for banks. TIP: Globalisation rapidly changed the movement of people, and at the same time technology revolutionised finance across borders. It became easier for taxpayers to set up accounts or hold assets outside their jurisdiction of residence and beyond the purview of their local tax authority. The Common Reporting Standard or CRS was designed to mitigate tax avoidance across borders. It is an initiative of the Organisation for Economic Co-operation and Development, or OECD, arising from the prompting of another global body known as the G20. Around 2014, the OECD requested that participating jurisdictions start to obtain standardised data on account holders from their financial institutions and then exchange it annually. CRS was designed to facilitate the deterrence of cross-border tax evasion by ensuring the transfer of high quality, predictable information between regulatory authorities. In Australia, this was implemented starting with effect from July 2017 – by way of amendments contained in the Tax Laws Amendment (Implementation of the Common Reporting Standard) Act 2016 (Cth). The first information exchange occurred in 2018. The Memorandum to the then Bill noted that the legal basis for Australia’s sharing of such information internationally was the Multilateral Convention on Mutual Administrative Assistance in Tax Matters from the 1980s – as amended in 2011. This convention provided “for all forms of administrative cooperation” and set out “strict rules” for the confidentiality and proper use of the exchanged information. Andrew will pick up this theme in a moment and describe some of the information that banks and other financial services have to capture about account holders. So when you go and open a bank account in most countries in the world, you’ll have to say what country you’re a citizen of and what country you’re a tax resident of and based on those two boxes, that information relating to your bank account or your bank records will in all likelihood in a complying jurisdiction or a participating jurisdiction will be forwarded to the ATO. So, you know, we don’t have bank secrecy anymore in most jurisdictions or Australian tax residents orcitizens can’t assume you’ll have bank secrecy offshore. |
| RD: | Cryptocurrency has historically fallen into a kind of data void for tax regulators the world over. What is the ATO doing in the data matching space to bring cryptocurrency in line with other assets? |
| AD:
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32:00 | The ATO commenced its data matching program in digital assets and cryptocurrency in 2019 analysing information they’d stored from the 2014, 2015 income year onwards. I understand this information or this data was obtained vis-a-vis the anti money laundering, counter-terrorism finance and related ‘know your customer’ reporting obligations. In 2021, the ATO notified us that they had commenced this second data matching program, and we imagine they’ll continue to data match for cryptocurrency indefinitely into the future. I think it’s also fair to say that their data matching tools, algorithms, and programs will increase in their sophistication and effectiveness. The ATO has reasonably extensive data from regulated or centralised crypto exchanges, certainly on-shore exchanges, from 2014 onwards. The ATO have also always had the ability to see what comes into and goes out of a taxpayer’s bank account. Any exchange dealer, broker or intermediary is required to record and provide the identity and transaction particulars on all transactions. So just like a bank. Getting back to your reference of a data void and a crypto data void for tax purposes, the continuing black spots or data voids, as I understand it, are transactions that occur on decentralised exchanges, which is where you have a platform that matches two anonymous parties and then they transact directly. While I understand the ATO doesn’t have a means of collecting information on these transactions, the nature of the blockchain – remember that all transactions are recorded on a blockchain – means that there is a record which stays around for a long time of that transaction even if it’s anonymous. TIP: Andrew has used some crypto jargon there that we should endeavour to explain. A centralised exchange or CEX is a crypto exchange modelled on traditional stock exchanges such as the ASX or NASDAQ. These exchanges are essentially marketplaces, where the CEX itself is a market player. Similar to a traditional exchange, the CEX keeps order books of buy and sell orders for market participants and engages in matching those orders to buyers or sellers and vice versa – very much like the ASX does for shares or options. If you were to buy cryptocurrency on a centralised exchange, the transaction would look similar to one which occurred on the ASX. The identity of the buyer and seller is known by the exchange. As a buyer, you would deposit funds in Australian dollars into a named account on a CEX. You would then use those funds to purchase cryptocurrency, which, at least temporarily, is stored on the platform in the custody of the CEX. You could then further exchange that crypto for another cryptocurrency or withdraw it from the platform. If you’re interested in watching the live operation of an Australian centralised exchange take a look at the market pages of a CEX such as Coinspot. What Andrew has just said is that the ATO has pretty good data for these centralised on-shore crypto exchanges – like it has for transactions that happen on the ASX. There are two key caveats for the ATO’s access to such data. The first is that the exchange is on-shore and the second caveat is where the exchange is decentralised. To address the on-shore issue, consider an off-shore centralised exchange operating in a jurisdiction beyond the power of the ATO – keeping in mind that many – if not all as Andrew will touch on in just a moment – in the crypto space seek to avoid regulation. This is one possible black spot for the ATOs data matching regime. The identity of the parties to a transaction may be known, but that data is beyond the reach of the ATO. A decentralised exchange, or DEX, is a creature of crypto. Essentially, a transaction occurs wholly between the transacting parties without the intervention of an exchange through self-executing smart contracts. This is usually in transactions which are crypto to crypto and not into or out of any kind of fiat currency. Keep in mind the two parties are essentially anonymous crypto wallets and not identified individuals. You still interact with a platform as a way to make the exchange, but a key difference is assets do not pass through the custody of the exchange. The assets go straight to each participant according to the smart contract. The key here, of course, is that the transaction is recorded on a blockchain and this is the element Andrew and the ATO are interested in – matching that transaction, between those anonymous crypto wallets, to an identity. We’ve already seen high profile examples of crypto fortunes being matched with identities, years down the track after the relevant transactions have occurred. To date, these have usually involved crime, well, some type of quite grossly criminal conduct and very large amounts of money. But again, this is probably an area that will develop. So you’ll see smaller amounts of money and less obnoxiousbehavior become detectable through algorithmic or data means. |
| RD: | You mentioned in your answer, the idea that the ATO can still track money coming into and out of a bank account. In relation to a decentralised exchange, as long as there’s some form of digital exchange, there is a record, even if it’s imperfect. So I guess the idea is that the data matching that the ATO wants to do is to try and match that transaction on your bank account with whatever is happening in a decentralised exchange. |
| AD:
33:00 | I don’t think they’ll be able to match what’s happening with your bank account directly with what’s happening on a decentralised exchange. What I think they will be able to do, and what I understand when I talk to people who are sort of technically proficient in blockchain technology is, they will be able to link up otherwise anonymous, physical wallet addresses or crypto wallet addresses and there’ll be able to connect the dots as it were and, you know, establish ownership. Again, this takes a lot of work I understand at the moment to do, but it’s certainly an area where I think you’ll see being achieved through less labour intensive means. |
| RD: | Basically we’re not going to be in a situation where we have a team of German investigators pursuing that data. |
| AD:
34:00 | Well, you might have a warehouse of servers pursuing that data, looking to match up common addresses. That’s I understand what the ATO data matching capability does at the moment. It looks for common elements. And when, when enough of these common identifiers are present, then it’s passed onto a human to either verify there’s been a data match, or to send it back to the keeper as it were. TIP: There’s been a lot of talk about ‘blockchain’. For those of you who aren’t familiar with the crypto space – and don’t worry, I don’t blame you – a blockchain is essentially a digital ledger. In cryptocurrency form, a blockchain records every single transaction made with a particular currency – think Bitcoin. Each transaction is recorded in a ‘block’ with a with a unique identifier. To make up the ‘chain’ part of its name, each block references the block before it. In this sense, together the blocks form the chain. You can’t go in and alter any of the data on the chain once it’s recorded generally because it’s distributed to a vast number of people. This means that every transaction is recorded and each is unalterable. Famously, or perhaps notoriously, the first cryptocurrency as we know it was crafted in 2008 in the wake of the global financial crises, by a person or group going by the nom de guerre of Satoshi Nakamoto. If you’re interested in what’s happening on the Bitcoin blockchain right now, you can check out all the transactions happening live by going to blockchain.com, clicking ‘Explorer’ at the top of the page and looking at ‘Latest Transactions’. |
| RD: 35:00 | Cryptocurrency advocates tend to be, or are notoriously pro-privacy, anti-regulation and anti-taxation. Going back to the ATOs compliance model, do you think there is a fundamental attitude divergence between crypto advocates and the ATO? |
| AD:
36:00 | Look Ross, I think that’s unfair to crypto advocates. When I speak to accounting firms who’ve sprung up in this area to serve crypto investors, crypto traders, and people otherwise interested in crypto, I hear two things. The first is that business is good and the second is that clients are more than happy to meet their obligations to the ATO and they very much appreciate the help their accountants are able to provide that enables them to do this. So I think it would be unfair to paint crypto advocates with a brush of anti compliance. They’re not tin foil hat people. In the past sure, but that, that time might’ve left us now like crypto’s quite mainstream. I think, you know, paying tax isn’t so bad because you only have to pay tax on profits. Right? If you’ve made lots of money, it doesn’t hurt that much to pay a little bit to the tax man, if that’s what you have to do. |
| RD: | If the future of cryptocurrency is more mainstream and attitude to compliance is also more mainstream, what’s in the future for tax disputes and the digital payment system? |
| AD:
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40:00 | Yeah. As you say, normalisation and regularisation – as I make up that word – are, I think, the future for tax and crypto in terms of tax crypto and tax disputes. My sense is that to date, the attitude towards cryptocurrency and related compliance, and I note this is evolving, is that many of the stories of fantastic fortunes talked about were unrealised and accepted in practice as such by investors and the tax office alike. The ATO have, for example, in the past accepted a record of money coming in and out of a taxpayer’s bank account as a basis to calculate a taxpayer’s CGT liability rather than what the CGT provisions actually require, which is, you know, what were the proceeds from each transaction? This approach may sound strange, but if you’re a crypto trader who makes a thousand transactions a day for five years, there’s an insurmountable amount of paperwork. And if you haven’t had this thought that you might need to keep records at the outset, it’s impossible to go back and work out. TIP: CGT stands for ‘Capital Gains Tax’ and it is the tax you pay on profits from selling assets. Assets include shares, stocks and bonds, meaning you are required to pay tax on the income or gain you make from offloading those assets. The only problem is that crypto trading involves the frequent, sometimes rapid and sometimes algorithmic buying and selling of cryptocurrencies and producing evidence to the ATO of your historic capital gains from crypto may be a sisyphean task. I don’t see that type of flexibility continuing into the future, which is the point of my article. The ATO will come to expect the same level of record keeping and accuracy in crypto and digital assets as they do for any other sector of the economy. So this, this will be a big change as we see a maturation of crypto we’ll also see a maturation of expectations of tax regulators around the world to crypto. And instances, I think dramatic non-compliance will, I think, have an increased likelihood of being detected. And when they are, I think it won’t be good news for the person who has either inadvertently or deliberately failed to report you know, what might be substantial transactions. Quite separately, and this is interesting about crypto, but quite separately, the Australian Government’s investigating the possibility of creating a stable coin or rather getting the RBA to create a stable coin. So a stable coin is a much more secure form of cryptocurrency. In the RBAs case, the stable coin would have its value pegged at something like one-to-one with the Aussie dollar. This is quite interesting and completely distinct from crypto currency we’ve discussed before in this interview. If you owned one Aussie pegged stable coin I would suggest that there’d be no taxation consequences at all if you traded that stable coin for two reasons. The first is that Aussie denominated stable coin would in all likelihood be classified as currency or digital currency under future amendments to the relevant tax acts. This is already the case with the GST act for all cryptocurrencies, but not the case with the income tax acts. Secondly, and this is a bit more fundamental and self-evident, if you have a digital currency pegged at one-to-one there can, by definition, not be any gain or loss when you buy or sell a currency. So getting back to it, a stable coin, an Aussie pegged stable coin, would have no tax consequences at all. And so two very different futures that appear to be in the same tent, but aren’t really. |
| RD: | Before we head off, Andrew, do you have any advice for those wanting to work in the tax disputes space? |
| AD: | Yeah, I do Ross. No two tax disputes are the same and no two practitioners or practices are the same. So I think it’s important to work in a variety of practices and understand how different practitioners think. There can be quite big differences in the skill sets, for example, of a lawyer, an accountant, or a barrister, just knowing the right one to seek advice from, from a perspective of the client is just as important as knowing who to learn off or who to work for as a junior lawyer. |
| RD: | Thank you so much for joining us. |
| AD: | Ross, thank you so much for having me. |
| RD: 41:00
42:00 | As always, you’ve been listening to Hearsay the Legal Podcast. I’d like to thank my guest today, Andrew Davidson, for coming on the show. Now, in today’s episode you heard an extract from episode 20 with Oliver Berkmann. That’s a really great episode that discusses NSW state taxes including the assessment of stamp duty, land tax and payroll tax, as well as the process for objecting to assessments and seeking merits review in the Supreme Court or NCAT. As you already heard, Oliver also explains the process of obtaining private rulings. If the tax part of today’s episode piqued your interest, definitely go check that one out. If you’re an Australian legal practitioner, you can claim one Continuing Professional Development point for listening to this episode. Whether an activity entitles you to claim a CPD unit is, as you well know, self assessed, but we suggest this episode entitles you to claim a substantive law point. More information on claiming and tracking your points on Hearsay can be found on our website. There’s less than a week until the 31st of March deadline! If you tell a friend about Hearsay, make sure to also let them know that they can get 25% off an individual Hearsay subscription if they enter the code ‘referee2022’ at the checkout. That’s r-e-f-e-r-e-e-2-0-2-2. Hearsay the Legal Podcast is brought to you by Lext Australia, a legal innovation company that’s out to change how you experience the law and legal services, and that includes CPD. I’d like to ask you a favour, listeners. If you like Hearsay the Legal Podcast, please leave us a Google review. It helps other listeners find us and that keeps us in business. Thanks for listening. With any luck your usual host David Turner will be back for the next episode of Hearsay. |
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