Journal of Australian Taxation
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TAXATION LAW DESIGN
By Michael D'Ascenzo[∗]
The purpose of this article is to explain the current framework for tax policy design and to consider how tax design processes have operated in relation to business tax reform measures such as Uniform Capital Allowances, Consolidations and the Tax Value Method. While the Australian Taxation Office plays a role in the tax design process, it does not make the final decisions on the shape of legislative proposals, nor is it the government's primary advisor on tax policy matters. This article also highlights the trade-offs and judgment calls that are made in formulating policy and considers impediments to more effective consultation and user based design processes both in relation to policy and the law. In this content it notes that the massive level of tax reform has stretched tax professionals to breaking point, and raises concerns about the disturbing trend of expecting new law to be clarified by Public Rulings.
The Australian tax reform experience of the last few years has, among other things, put the spotlight on the legislative design process and attendant accountabilities. Integrated taxation design was a primary focus of the Review of Business Taxation (“Ralph Review”).[1] The Ralph recommendations addressed a long-standing concern in Australia regarding the complexity of our tax system and the Income Tax Assessment Act 1936 (Cth) ("ITAA36") and the Income Tax Assessment Act 1997 (Cth) ("ITAA97") in particular. Indeed, the Joint Committee of Public Accounts was concerned in 1993 that "the complexity of the Income Tax Assessment Act 1936 is the principal, underlying problem of the current taxation system".[2]
In the international context, Australia is not alone in pondering the complexity of its tax law. Of the United States Internal Revenue Code, Judge Learned Hand lamented:
In my own case the words of such an act as the income tax, for example, merely dance before my eyes in a meaningless procession: cross-reference to cross-reference, exception upon exception – couched in abstract terms that offer no handle to seize of –leave in my mind only a confused sense of some vitally important, but successfully concealed purport, which it is my duty to extract, but which is within my power, if at all, only after the most inordinate expenditure of time.[3]
The frustration is echoed by Henry Simons' call for simplification:
Simplicity in modem taxation is a problem of basic architectural design. Present legislation is insufferably complicated and nearly unintelligible. If it is not simplified, half of the population may have to become tax lawyers and tax accountants.[4]
Of the Organisation for Economic Cooperation and Development ("OECD"), it has been observed that:
unfortunately, the tax laws of most member countries of the OECD have grown so complex that they are barely understandable to tax practitioners in the country concerned and are even more impenetrable to outsiders.[5]
The complexity of law therefore provides a spur to tax reform, but also a cautionary note – when it comes to tax reform, one can easily underestimate the complexity of the undertaking.[6]
The Ralph Review's recommended tax design approach featured internal coordination between the agencies responsible for tax reform, together with an emphasis on consultation. In particular, it recognised the need for early participation in the tax design process by the business and wider taxpayer community, and for consideration of practical consequences at the same time as policy intent. The Government has supported this "strong commitment to consultation".[7]
Detailed proposals for changes to Australia's tax system are normally developed within the Treasury portfolio, in conjunction with the Office of Parliamentary Counsel ("OPC"), in accordance with the policies and decisions of the Government:
• the Treasury is accountable for policy development and from 1 July 2002 will also be accountable for the design of the tax laws and regulations;
• the Australian Taxation Office ("ATO") was accountable for providing drafting instructions to the OPC on the detailed design and development of administrative and compliance systems to give effect to the legislative provisions; and
• OPC is accountable for the design and drafting of the law.[8]
Under the arrangements operating to 1 July 2002 it is worth emphasising the point that the final say on legislation is a political decision, and that tax laws are not made (nor written) by the ATO, and that the ATO is only one (and not the main) advisor on tax matters. The particular focus that the ATO brings to the policy table is advice on the administrability of a proposed law and the potential impacts of a measure on the community or relevant segment of the community. This is reinforced by the new arrangements announced by the Treasurer on 2 May 2002.
The quality of the advice provided is often dependent on the extent of consultation that is allowed by government in relation to a measure. Ultimately, the extent to which often competing considerations are taken into account in the legislative design are determined by the legislative process.
In August 2000,[10] the Government announced the establishment of a Board of Taxation ("Board") to advise the Treasurer regarding the tax system. Recognising the Government's responsibility for determining tax policy and the statutory role of the Commissioner of Taxation ("Commissioner"), the Board's role is to contribute a business and broader community perspective in the administration of the tax laws aimed at improving the design and operation of the tax system. The Board consists of ten members – seven appointed from the business and community sectors in their personal capacities and three in their official capacities – the Secretary to the Treasury, the Commissioner and the First Parliamentary Counsel.
The Board from time to time may be tasked with overseeing development of a particular measure, and to undertake an ongoing role in monitoring the process of consultation.[11] An indication of the potential this has for improving traditional approaches to tax design is highlighted by the Board's role to date in relation to the proposed Tax Value Method ("TVM").
The Ralph Review also recommended that business taxation policy be developed systematically, initiated within the Treasury portfolio in consultation with the business community:
It is in everyone's interests for Australia's business tax system to be accepted by all affected parties, including business, the broader public and those who must administer the system. To this end, changes to the system should be proposed, wherever possible, only after wide consultation. Such consultation should commence at the earliest possible stage of the policy development process and continue throughout implementation.[12]
Processes for developing key business tax reform recommendations such as uniform capital allowances, consolidations and the TVM highlight a growing appreciation of the need to clearly understand what it is that policymakers really want to accomplish in the light of the administrability of the measure, and importantly, with an understanding of the impacts of the measure on business and the wider taxpayer community. These underline the need for an Integrated Tax Design process.[13]
The alienation of personal services income provides an interesting case study which reflects the difficulty of engaging in effective consultation at a time of massive tax reform, and an unnatural trend for tax professionals to require ATO Public Rulings in relation to all new laws.
The alienation measure was a recommendation of the Ralph Review and is an integrity measure designed to apply to services undertaken in an employee-like manner.[14]
In designing the legislation there was consultation with industry and professional bodies on the criteria of what constituted a personal services business. The measure was also considered by the Senate Economics Legislation Committee which received various submissions.
The legislation was drafted in a manner that was intended to reflect the recommendations of the Ralph Review. In the Senate Committee's June 2000 report, the majority recommended that the New Business Tax System (Alienation of the Personal Services Income) Bill 2000 be passed, the Labor Senators reserved their position and the Democrats canvassed (among other things) possible ways to tighten the personal services business tests. It was passed and received Royal Assent on 30 June 2000.
The legislation was followed by an extensive education program targeted at tax agents. This included ATO visits to over 4,000 tax practices, conducting seminars for tax agents, participation in tax discussion groups, writing to all tax agents, publishing articles in newsletters, issuing fact sheets and placing extensive information on the ATO website.
However, it was not until the release of draft Public Rulings on the matter in April 2001 that the measure came under intensive scrutiny by the tax profession and some industry bodies.
A perusal of the recommendations the Ralph Review and the Explanatory Memorandum which accompanied the New Business Tax System (Alienation of Personal Services Income) Act 2000 (Cth) shows that the draft Public Rulings were consistent with the policy intent expressed in those documents.
However, the further consultation which the draft Public Rulings engendered resulted in clarification of the policy intent and in the Government agreeing to legislative changes.[15]
The finalised Public Rulings incorporated the revised legislative scheme and the clarified policy intent.
Public Rulings are generally issued as drafts as a means of promoting consultation and input on the ATO's interpretation of the law. The alienation draft Public Rulings were successful in this regard and provided the spur to the clarification of policy and legislative change.
However, the controversy that arose following the release of the drafts is instructive in two ways. Firstly, the initial consultation and educational activities undertaken were not able to bring concerns to the policy table either during the legislative process or soon after. This is probably a reflection of the difficulty tax agents and their professional bodies had in focusing on this measure (whose impact on them would have occurred well after the enactment of the law) having regard to massive tax reform and extreme work pressures.
A disappointing feature of the controversy that arose was the claim that taxpayers were not in a position to comply with their obligations under the law because the ATO had not yet issued finalised Public Rulings. This is a disturbing claim because it ignored the existence of the law itself, including extrinsic material such as the Explanatory Memorandum, and the extensive amount of educational material that had been made available by the ATO.
In part it undoubtedly reflected the difficulty that tax professionals faced in handling the magnitude of the tax reform changes, and this is understandable. However, to expect all new law to be clarified by a large number of Public Rulings puts into question the role of tax professionals and of Public Rulings.
Public Rulings are designed to provide the ATO's view of the law in matters of genuine uncertainty, so as to increase the level of taxpayer certainty. Public Rulings do not make the law, nor are they legislative instruments.[16] They are only binding on the Commissioner, not the taxpayer.
The objective of good legislative design is to ensure that the legislation is "clear, certain and consistent".[17] Under this model Public Rulings would only be required where, in the course of the operation of the law, issues arise that have not been considered during the legislative process and there is genuine uncertainty as to how particular statutory provisions apply to these matters.
Sometimes these issues arise as "unintended" consequences. Often, the legislation is capable of a purposive construction that takes into account the wider context, including the policy intent.[18] However, at other times, these "unintended" consequences are the outcome of the way the law has been drafted and of how the law, properly interpreted, operates. Where these consequences reflect the legislative intent, having regard to the intrinsic limits imposed by the statutory provisions, they are ultimately more appropriately corrected by a change in the law itself, and not through some extra-statutory concession.
An alternative model, which contemplates ATO Public Rulings as a normal incident of the legislative process, would elevate their status to legislative instruments akin to regulations (which they are not) and would result in an increase in the volume of tax material possibly having an adverse effect on simplification and certainty. Such an approach could also impact on the burden of compliance and administration, and might detract from the legislative task of making the tax law more user-friendly – that is, easier to understand, and easier and less costly to comply with. It would also blur the distinction between the executive role of government and the administrative role of the ATO.[19]
The Ralph Review was as explicit about the need for reform of the process of tax design as it was about the need for particular policy changes. Indeed, the Review foresaw that the only way to break the cycle of major rounds of tax reform, which seem to arise every decade or so under the weight of ad hoc legislative changes introduced during the intervening period, was through the development of a more mature tax design process.[20]
Building on the insights of the Ralph Review, the ATO has in conjunction with Treasury and OPC established an Integrated Tax Design Project, whose Sponsors' Group includes not only senior representatives of the ATO, Treasury and OPC, but also the Chairman of the Board, Mr Dick Warburton, and the former Chairman of the Ralph Review, Mr John Ralph AO.[21]
At the heart of this work has been the adoption of the principles of good design processes borrowed from other fields of design and, indeed, from the discipline of design itself, including "user based design".
At the administration level one small example of the work the ATO has been doing with users has been the design and development of guides required for the Simplified Tax System for small business. As with most measures there was a need to explain the nature of the proposed changes to those who would be affected by them. This was especially important in this case because the proposed measure would require small businesses to choose whether they wanted the new rules to apply to them or not.
Traditional approaches might have seen the ATO write the kind of material the ATO thought was appropriate, and then conduct some market testing with focus groups about the brochure or booklet developed. Provided the testing results were not show stoppers, the ATO would most likely have proceeded as planned.
With the Simplified Tax System measure the ATO took a different approach. It selected a number of small business people and, with their agreement, sat down with them one-on-one and asked them about the level of information they would like to see and how they would like it presented (such as a one page flyer, a small booklet, or a brochure, or material on the internet). We followed up within a few days with mock-ups of alternative products and asked the people to use them. We were able to observe first hand how they used and responded to the various products – what worked well and what caused confusion – and were able to reshape the final products accordingly.
The quality of the final products was better than might have been the case under more traditional approaches, based on the testimony of those involved.
This more empathetic design approach and the lessons learnt are now reshaping many of the ATO's existing strategies for helping this section of the community.
We are also embedding these new approaches in the way we go about the administrative contribution to tax design work, including the work we are doing with Treasury and others on consolidations and with the Board and others on the TVM. Rather than approaching the design task purely from a legislative or internal process perspective, the ATO is encouraging the development of the design from the "outside in" and, wherever possible, with input from real taxpayers.
The consolidations regime is based on the concept of a Consolidated Tax Entity – a "virtual" entity that transacts as a single entity with entities outside the consolidated group. Conceptually, under the new regime the entities within a company group are seen as company divisions rather than subsidiaries. The motivation for embarking on such a significant change stemmed from the high compliance costs and high tax revenue costs (and concomitant complex anti-avoidance provisions) associated with the existing tax treatment of company groups.[22]
The Ralph Review saw consolidation as offering major advantages to entity groups – in terms of both reduced complexity and increased flexibility in commercial operations.
The Ralph Review also noted the potential for existing loss and asset transfer provisions for wholly owned groups of companies to facilitate the creation of artificial losses and replication of losses in company groups. It noted that it was also possible for group companies to gain unintended tax advantages by dealing among themselves and that anti-avoidance provisions were complex and outdated. It therefore identified consolidation as having the potential to address these integrity issues and to deliver significant efficiency gains both to entity groups and the tax authorities. The logic of allowing the tax system to ignore internal transactions appeared compelling to the Ralph Review.[23]
The policy intent of the proposed consolidation regime comprises the key principles of the Ralph Review.[24] These principles are subject to two overriding considerations: the integrity of the tax system and efficiency for the participants. In addition, the consolidation regime is intended to be tailored for different corporate groupings across the whole market; is designed to reinforce self-assessment; should align the processes for Consolidated Tax Entities with how business is done; and seeks to adopt reasonable information management principles.
Profiling of the taxpayer groups potentially affected by this regime is continuing. The ATO is currently of the view that the measure will have an impact across large, medium and small groups but that the final impact of the regime will vary according to a group's structure, the tax attributes of its entities, and the group's tax and corporate strategies. The ATO currently estimates that approximately 12,000 groups may choose to consolidate some 55,000 member entities.
In practical terms, this means that most corporate groups will need to know their group structures and the scope of the regime in order to take advantage of the proposed regime.
On 8 December 2000, the Treasurer released the consolidation exposure draft. The community has responded to that exposure draft with submissions being received from stakeholders across the whole corporate sector. Since that time, Treasury and the ATO have been assisting the Government to refine the legislative proposals and the ATO has been working on the administrative aspects of the regime. Major areas of focus include:
• initiatives to minimise the cost of compliance;
• ensuring the market valuation aspects of the regime work sensibly in practice;
• Capital Gains Tax aspects of the regime;
• application of the regime to foreign owned multinationals;
• efficiently dealing with group entries and exits; and
• ensuring taxpayer access to senior technical decision-makers particularly through the transitional phase.
Consultative forums included focus groups for Administration and for Policy and Legislation. There are also sub-groups looking at the Small/Medium Enterprise sector and at technical issues such as market valuation. These focus groups and sub-groups are playing an important role in ensuring that the Government develops a law that realises the regime's policy intent, is integrated into the tax code, and which works well in its practical implementation.
Consultation on this regime is extensive and ongoing and has already prompted modifications of the proposed regime. For example, on 16 May 2002 the Minister for Revenue and Assistant Treasurer detailed the following measures to support the commencement of the consolidation regime:[25]
• Grouping rules for corporate groups will be retained for another 12 months.
• Amendments to the imputation system to ensure that companies do not waste current year losses against franking dividends.
• Modification of the membership rules to allow non-profit companies to be eligible head companies of a consolidated group and allowing companies subject to the mutuality principle and co-operatives taxed under Div 9 of the ITAA97 to be part of consolidated groups and or be a head company of a group.
• Amending the core rules to maintain the tax character of a subsidiary's assets or expenditure on entry or exit from consolidation.
• Modify the "one in all in" rule for multiple entry consolidated groups.
• Modify the Pay As You Go system.
• Allowing foreign tax credits transferred to a head company to be available to the head company at the end of its income year following the year of transfer, except in certain circumstances.
• Allowing Australian branches of foreign banks to continue to be able to group with their wholly-owned subsidiaries for thin capitalisation purposes on a consistent basis with consolidation.
• Amending Divs 165 and 166 of the ITAA97 in order to remove an anomaly that prevents companies from potentially using certain losses where they are unable to identify a precise date on which they failed the continuity of ownership test.
• Amendments to the income tax law affecting life insurance companies to ensure that losses incurred by life insurers are not reduced by certain exempt income.
Over the course of implementing its business tax reforms, the Government has adopted the practice of releasing exposure drafts of legislation in order to allow "co-design" of legislation. This was done for both consolidations and uniform capital allowances.
The consolidation measure will commence from 1 July 2002.[26]
The Government's general intention was to simplify and unify capital allowances on the basis of common concepts and mechanisms, subject to the maintenance of some pre-existing special arrangements. A uniform system of capital allowances would provide a more neutral tax treatment for capital expenditures and hence should improve the quality of investment and economic efficiency.[27] The Government also had specific intentions regarding the mining and resources industry, namely that the former special provisions for that industry be brought within the general capital allowances provisions. In other words, it was intended that there were to be closer alignment of the tax treatment of mining expenditures with that of other industries. For the mining and resources industry, this meant the introduction of effective life write-off and the recognition of some black hole expenditure. The capital allowances provisions were meant to deal with black holes in relation to depreciating assets. Other black hole expenditures, dealt with "in principle" under the proposed TVM, could also be considered for possible case-by-case treatment once the capital allowances provisions were effective. The Government's policy intent largely mirrored the Ralph Review recommendations.[28]
Exploration and prospecting were considered as a special case by the Ralph Review. Because of the uncertainty about the value of exploration and prospecting results, the Review recommended that expenditures on exploration and prospecting remain (effectively) immediately deductible, and the Government agreed with this.
Under the new system, mining and resources costs have been brought into the new capital allowances framework as completely as possible.[29] Mining information, and mining rights, have been specifically included as depreciating assets; this means their depreciation, and the reconciliation of depreciation to actual loss of value, follow much the same rules as for any other depreciating assets. Other depreciating assets used by the mining and resources industry are dealt with similarly.
The balance of the costs that used to be dealt with as mining allowable capital expenditure or minerals transport expenditure are now covered by, the new, general concept of project expenditures under the capital allowances framework. This ensures that what used to be deducted continues to be deducted, but on a more generalised basis.
Transition of pre-1 July 2001 expenditures to the new rules is a general problem for the capital allowances framework, but it has special difficulties for the mining and resources industry. Those transitional issues are specifically dealt with in the capital allowances legislation.
An ideal process involves full taxpayer participation in the development of policy, its legislative expression, and the development of administrative procedures and initiatives. For the capital allowances framework, the Ralph Review provided for an extensive level of taxpayer participation, including submissions and wide consultations.
The Government's release of the full exposure draft of December 2000 enabled the ATO to initiate detailed consultation with taxpayers and practitioners, as well as specific consultation with the mining and resources industry. That face-to-face consultation, together with a range of written submissions, strongly influenced features of the proposed legislation and had a real impact on the preparation of the transitional and consequential measures that were necessary.
Subsequently, a further exposure of draft legislation included not only the revised main provisions but also the transitional and consequential provisions. After this release, the ATO was able to initiate further detailed consultation on the new draft.
Business and industry input has contributed to make the final provisions more workable and has reduced compliance costs.
The proposed TVM has been a key focus of the Board.
The TVM (also known as Option 2) is a proposed framework for calculating a taxpayer's taxable income. Using this framework, taxable income is calculated on the basis of cash flow plus changes to the tax value of assets, rather than the present system based on legal interpretations of income and deductible expenses. The TVM has received in-principle support from the Treasurer, who noted that, if implemented properly, it had "the potential to underwrite the development of a stable, less ambiguous and more understandable income tax system, and in particular, one more readily conducive to the manageable, ongoing development of the tax system into the future".[30]
Many acknowledge the need for a more streamlined tax law. However, in the wake of extensive tax reform, there have been reservations among many, including the accounting profession, regarding the wisdom of introducing the TVM. The proposal raises many questions regarding practical impacts and implementation. How would the Act be structured under the TVM? Would the legislation achieve its objectives, or would it introduce new problems? Would it work on a practical level and how would the transition be made from the present law? Importantly, there is also uncertainty about how the courts would ultimately interpret the new law. Accordingly, the Government's in-principle support was also qualified by an awareness that "there are many detailed issues that need to be resolved as the tax value method is developed and this will require ongoing consultation with all sectors of the business community as well as a major education for practitioners".[31]
The Board's consideration of the TVM has included the establishment of a Legislative Group and a wider Working Group; the progressive release of demonstration legislation as it is drafted onto the Board website; a conference that was held in July 2001 with key representatives from the business community; and the commissioning of case studies and testing of entity accounts.[32]
This Legislative Group had primary responsibility for developing and drafting the demonstration legislation. It comprised officers from the Treasury, ATO and the private sector. Prototype legislation and explanatory notes were uploaded onto the Board's website (at www.taxboard.gov.au). The drafts are not endorsed by the Treasurer, and do not reflect the official views of the Treasury, the ATO, OPC, the Board or the drafters. They were released as a work in progress, with comments invited from the public.
The Board also established a Working Group, which consists of fourteen private sector experts drawn from the tax practitioner, accounting, corporate finance, legal and academic spheres. This group has contributed practical advice and ideas to the legislative drafting, development and evaluation processes. It has been a first point of consultation for the Legislative Group, and its members are free in turn to tap their wider contacts and communities for input.
The first round of testing of the TVM concept considered the accounts of Telstra, Australia Post and BHP. The key objectives were to determine whether the TVM contained any conceptual flaws and to identify any key issues that might need to be addressed in the legislation. The Working Group was also asked to identify any compliance issues. It interpreted and applied the most recent draft of the legislation to the test data and test transactions.
The Working Group found that the testing did not surface any insurmountable obstacles. It also found that a typical set of accounting and tax records provided sufficient information to calculate taxable income under the TVM. It concluded that taxable income could be calculated using either a profit reconciliation or balance sheet method, and that adopting the TVM as a tax calculation can simplify the calculation of taxable income.
Following this first round, the testing program has expanded to include six smaller entities with turnovers of between $2 million and $10 million. The results from testing small to medium entities will be important to the Board's eventual recommendation about whether to proceed with the TVM, given the doubt expressed in some accounting circles on whether such businesses will gain any significant benefit from the proposed measure.
As part of the Testing Program, Pitcher Partners, a Melbourne accounting firm, prepared taxable income calculations based upon the records of four of its small medium enterprises clients: an individual, a partnership, a trust and a company. In each case, they were able to determine the entity's taxable income by reconciling from both the balance sheet and profit and loss statement of the client. Naturally, Pitcher Partners experienced some difficulty in areas where the prototype legislation was incomplete (eg the treatment of distributions and membership interests) and raised a number of issues requiring clarification (eg in the leasing area). Nonetheless, the testers reported that it should be possible to arrive at a taxable income figure for all of their clients on the basis of existing data. They thought that the profit reconciliation method provided the "shortest route" to determining net income. However, they found that the balance sheet method was "truer" to the structure of the TVM system, and might therefore have the advantage of resulting in fewer errors.
Work has also been undertaken to develop administration products to support the prototype legislation. In particular, three different approaches to calculating taxable income have been devised and are being tested with tax practitioner and business representatives.
• the first method calculates taxable income by reconciling from accounting profit;
• the second method directly tracks the changes in the tax values of recognised assets and liabilities from year-to-year; and
• the third method determines taxable income by identifying different categories of income and expense which would be recognised by TVM in precisely the same way as they are presently (eg dividends, rent, salary etc).
On 14 May 2002 the Government noted that the Board is currently receiving public comment on its prototype legislation for TVM and that the Board expects to be able to provide its recommendation by the middle of the year to the Government as to whether and when the TVM should be introduced. The Minister for Revenue and Assistant Treasurer said:
Without prejudicing the Board's or the Government's views on whether TVM should proceed, it is clear that any implementation could not occur before July 2005, at the earliest. In the meantime, consideration of reforms to the taxation of rights and any blackhole expenditures will continue to be undertaken on a case-by-case basis.[33]
The Ralph Review acknowledged that there would be winners and losers from tax reform. Policy trade-offs are inherent in any such endeavour: "the nature of tax policy development is that judgments have to be made and accepted about trade-offs between particular objectives" [34]
In addition, practical concerns about compliance costs and the administrability of a measure, or its revenue impact, or the community's likely acceptance of the measure have to be weighed against its relative merit in tax policy terms. An example of the latter is the use of realised rather than accrued gains in the existing capital gains regime and the consideration currently being given by the Board on the TVM.
The absence of a recommendation by the Ralph Review to allow a deduction for the amortisation of acquired goodwill is explained by it in terms of the potential revenue impacts.[35]
The Government's decision to defer Entity Taxation (which is aimed at promoting horizontal equity and investment neutrality) was motivated in part by the compliance cost considerations flowing from the draft legislative design.[36]
Simplicity and compliance cost considerations were the focus of the Ralph Review's recommendation of a simplified tax system for small business.
One major trade-off considered by the Ralph Review and accepted by the Government, was the abolition of accelerated depreciation and the reduction in the company tax rate to 30%:[37]
A reduction in the company tax rate will move Australia more into line with our competitors for international capital flows and will thus have a positive effect on the level of investment, economic growth and jobs. This will be offset to varying extents in those sectors of the economy benefiting from accelerated depreciation.[38]
The considerations required for this judgment call make it clear that effective consultation requires all parties to acknowledge the bigger picture so that there can be an appropriate weighing up of the policy alternatives from the perspective of the overall benefit for the Australian community.
In evaluating recent initiatives toward more integrated tax design, the jury may still be out, but it is also true that all the evidence is yet to be presented. While taxpayers and agents are still coming to grips with the New Tax System and have at times been overwhelmed with the extent of the reform agenda (including the Goods and Services Tax, the Australian Business Number and Pay As You Go), the system is in large measure up and running.
There is little doubt that, for the vast majority of smaller businesses, the quarterly reporting task has become easier over the first year as they have become more familiar with the process and bedded down operating and recording systems to cope with the compliance task. For example, mainstream qualitative research shows that most businesses have found each successive Business Activity Statement ("BAS") easier to complete as they become more familiar with their compliance obligations. Most are also confident that they have been filling their BAS in correctly.[39]
Nevertheless, in response to community concerns, in February 2001 the Government announced the BAS simplification measures. They allow for simplified reporting arrangements and an instalment system accompanied with an end of year settlement. These changes required significant systems and forms redesign, and a marketing strategy for the new measure. By the end of the year around 11% of the eligible BAS population had elected to take up the new arrangements. These changes represent a refinement to a system that was working, so as to provide greater taxpayer choice (which comes at an administrative cost).
In relation to business taxation, the Board is well placed to make recommendations to Government directed at improving the workability of the tax system and tax reform and to highlight areas where further consultation is needed.
One obvious example of practical assistance has been the Board's recommendations to Government concerning the timing of implementation for various reforms. In early 2001, the Board recommended staging implementation of certain measures, to allow greater time for adjustment. As a result, several measures originally intended for 1 July 2001 were deferred to 1 July 2002, including Consolidations and Entity Taxation.[40]
Whatever view one takes on the approaches adopted to date, there is a growing acknowledgment that effective consultation is a necessary ingredient for good tax design – from policy design to implementation, service delivery and the development of regulatory systems and approaches. The ultimate objective should be to adopt and implement a more certain, equitable and durable taxation system to deliver lasting benefits for the community.[41] The underlying basis of such a system has to be a coherent body of tax law that reflects good policy design, and which is "clear, certain and consistent".
[∗] Second Commissioner of Taxation. This article is based on a paper presented to the Minerals Council of Australia 2001 Taxation Conference 12-14 September 2001. The author would like to acknowledge the contribution of the following people in preparing this article: Peter Coakley, Christopher Hood, Neil Olesen and Caroline Archer.
[1] Review of Business Taxation, A Tax System Redesigned (1999) 95 and 129 ("A Tax System Redesigned"):
Recommendation 1.1 Integrated tax design process: That a more systemic and integrated taxation design process be formalised between the Treasury, the Australian Taxation Office and the Office of Parliamentary Counsel – the three Commonwealth agencies with responsibilities relating to the design and administration of taxation law.
Recommendation 2.1 Establishing the Integrated Tax Code: That the integrated taxation design process (Recommendation 1.1) be adopted as the process within which to establish the Integrated Tax Code announced by the Government in A New Tax System.
[2] Joint Committee of Public Accounts, Report 326 – An Assessment of Tax (1993) 76. One outcome of the JCPA's recommendations was the Tax Law Improvement Project. That work has now been subsumed by the longer-term goal of developing an Integrated Tax Code: Commonwealth Treasurer, Press Release (No 74, 11 November 1999) ("November 1999 Press Release").
[3] As quoted in I Dilleard, Learned Hand, The Spirit of Liberty: Papers and Addresses of Learned Hand (1952) 213.
[4] HC Simons, Federal Tax Reform (1950) 28.
[5] V Thuronyi (ed), Tax Design and Drafting (Vol 1, 1996) xxvii.
[6] RK Gordon and V Thuronyi, "Tax Legislative Process" in ibid 6.
[7] November 1999 Press Release, Attachment O and Commonwealth Treasurer, Press Release (No 22, 2 May 2002) ("May 2002 Press Release").
[8] On 2 May 2002 the Treasurer announced that from 1 July 2002 responsibility for the design of tax laws and regulations will be relocated from the ATO to Treasury: May 2002 Press Release.
[9] The Ralph Review (A Tax System Redesigned, 99) recommended agency coordination, featuring:
• Integrated arrangement whereby specialist staff from the Treasury, the ATO and the OPC work together in cross-functional integrated teams throughout the tax design process; and a
• Board of Taxation with majority membership to be drawn from the private sector, but representatives from the above agencies, to monitor the implementation of the integrated tax design process and advise the Treasurer generally on systemic matters pertaining to business taxation.
[10] Commonwealth Treasurer, Press Release (No 83, 10 August 2000).
[11] May 2002 Press Release.
[12] A Tax System Redesigned, 107-108.
[13] The May 2002 Press Release noted that the "new working arrangements between the agencies in developing future tax measures should seek to build on progress to date in ensuring a high level of integration across the policy, legislative and administrative aspects of change".
[14] A Tax System Redesigned, 286-294: Recommendations 7.2, 7.3 and 7.4.
[15] Commonwealth Treasurer, Press Release (No 47, 29 June 2001); and Commonwealth Treasurer, Press Release (No 51, 9 July 2001).
[16] Media claims that Public Rulings can in some way be "retrospective" are wrong and misleading. The law is the law from when it is enacted. Public Rulings only articulate how the ATO interprets that law.
[17] A Tax System Redesigned, 114.
[18] See M D'Ascenzo, "Along the Road to Damascus: A Framework for Interpreting the Tax Law" (2000) 3 Journal of Australian Taxation 384.
[19] In contrast, the May 2002 Press Release sought to more clearly articulate that distinction.
[20] Note now the Government's in-principle position on the development of future tax measures: May 2002 Press Release.
[21] From 1 July 2002 leadership of the Sponsors' Group will be transferred from the ATO to Treasury.
[22] A Tax System Redesigned, 517.
[23] Ibid 70.
[24] The six original key principles of the policy intent, as set out in the Ralph Review (ibid 517) were:
• consolidation is optional, but an entity that chooses the consolidate must do so for all wholly-owned subsidiaries (the "one in all in" rule);
• treatment to be as a single (virtual) entity;
• current grouping concessions would no longer apply;
• losses and franking balances may be able to be transferred into the group by joining entities;
• losses and franking balances remain with the group after an entity's exit; and
• tax values of assets and liabilities determined by an asset-based model.
[25] Commonwealth Minister for Revenue and Assistant Treasurer, Press Release (C59/02, 16 May 2002).
[26] Commonwealth Minister for Revenue and Assistant Treasurer, Press Release (C57/02, 14 May 2002 and C59/02, 16 May 2002).
[27] November 1999 Press Release, Attachment L.
[28] A Tax System Redesigned, 70.
[29] A detailed summary of the application of the uniform capital allowance regime to the mining industry is provided in G Sykes, "Uniform Capital Allowances" (paper delivered at the CPA Resource Convention 2001, Perth; 17 August 2001).
[30] Commonwealth Treasurer, Press Release (No 81, 7 July 2000).
[31] Ibid.
[32] The Board developed a two-stage approach for advancing the development and evaluation of the tax value method. The first stage was to develop a draft legislative framework sufficient to demonstrate and effectively test the proposed law. This framework focuses on some fundamental aspects, including the treatment of assets and liabilities, the distinction between business and private income and payments, the treatment of non-cash transactions, and Capital Gains Tax issues. The second stage consisted of further developing these core rules with a view to releasing an exposure demonstration legislative package. This demonstration legislation would then be further tested and evaluated with a focus on the compliance practicalities of the TVM and its capacity to accommodate future changes to the law.
[33] Commonwealth Minister for Revenue and Assistant Treasurer, Press Release (No C57/02, 14 May 2002).
[34] A Tax System Redesigned, 13.
[35] Ibid 23-24.
[36] Commonwealth Treasurer, Press Release (No 16, 22 March 2001).
[37] A Tax System Redesigned, 29.
[38] Ibid 24.
[39] Market research conducted with business operators in August 1-8 2001.
[40] See note 30 above.
[41] A Tax System Redesigned, 2.
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