THE TAXATION INSTITUTE OF AUSTRALIA
40^TH ANNUAL VICTORIAN STATE CONVENTION, LORNE
31 AUGUST 2001 TO 1 SEPTEMBER 2001

'UPDATE ON CURRENT ISSUES BEFORE THE BOARD OF TAXATION'

PRESENTATION BY MR DICK WARBURTON
CHAIRMAN OF THE BOARD OF TAXATION
9am FRIDAY 31 AUGUST

Introduction

Good morning everybody. I would like to thank the Taxation Institute of Australia for inviting me to its State Convention to talk to you today.

I have been asked to speak about some of the specific activities of the Board to date and also more generally about the Board's composition and priorities going forward.

I intend to spend maybe half or a little more of the time available talking about these issues, before inviting questions from the floor.

Most of you here, I am sure, will have some knowledge of the Board. But I think it would be useful to provide a recap on what it is and where it came from, before looking more closely at our broader objectives, the Board's current activities and our priorities looking further ahead.

Origins and Membership of the Board

The Board's creation, of course, was a recommendation of the Ralph Review of Business Taxation.

This recommendation basically emerged out of a concern that the voice of business was not being effectively heard or countenanced by Government and its advisers in the development of taxation laws.

The common perception is that all too often tax laws are proposed or enacted which fail to reflect the realities of commercial practice or the circumstances of individuals, impose unnecessary compliance burdens, have unintended consequences, or that, perhaps, the final legislation is not consistent with the actual policy intent.

Similarly, the perception is that problems in the general operation and functioning of the tax system, which might emerge, for example, as a result of underlying global, industrial, and environmental trends, are not always appreciated early enough by Government and its advisers.

In broadly adopting the Ralph recommendation, the Government determined that the Board should have a broader, whole-of-tax system view rather than just a business tax focus. It was also decided that the Board would be an advisory body rather than a statutory body.

The Board was officially established in August of last year. Many of you will be aware of the identities of the Board members, but for those you who are not the Board's membership includes seven members drawn from the private sector. In addition to myself, the private sector members are:

• John Bronger (National President of the Pharmacy Guild of Australia);

• Tony D'Aloisio (Chief Executive Partner, Malleson Stephen Jaques);

• John Harvey (Former CEO of PricewaterhouseCoopers);

• Brett Heading (Partner, McCullough Robertson Lawyers);

• Chris Jordan (Taxation Partner at KPMG); and

• Alison McClelland (Associate Professor in Social Policy at Latrobe University).

These members have been appointed with a view to their abilities personally to contribute a broad range of relevant business, practitioner and broader community knowledge and experience to the development of the tax system.

Also on the Board, as ex-officio members, are the Heads of the three key Government agencies responsible for tax policy, tax administration and legislation - the Secretary to the Treasury Ken Henry, the Commissioner of Taxation Michael Carmody and Hilary Penfold the First Parliamentary Counsel.

The Board is supported by a small Secretariat based in the Commonwealth Treasury - a team of five that consists of three Treasury personnel (including the Secretary to the Board), and secondees from the ATO and industry.

The Board is currently being allocated an annual budget of $2 million, which after running costs gives it around $1.5 million of discretionary spending a year.

The Role and Objectives of the Board

The Board's mission, as stated in its Charter, is to:

"...contribute a business and broader community perspective to improving the design of taxation laws and their operation."

Ultimately, the Board is here to contribute, in the broadest possible terms, to better tax system outcomes, by facilitating more effective community input into the development and implementation of tax laws.

In pursuing this mission, the Charter reminds that the Board must have regard to the fact that the Government is responsible for determining taxation policy and that the Commissioner of Taxation has statutory responsibilities for administering Australia's tax laws.

It is very important to recognise that the Board is purely an advisory body to the Treasurer. It has no mandate to determine, or indeed to lead public debate on, taxation policy matters unless otherwise authorised by the Treasurer. Nor, obviously, does the Board have any authority to inquire into or advise on the affairs of individual taxpayers or other matters that would conflict with the statutory role and responsibilities of the Commissioner of Taxation. As members, the Commissioner of Taxation and the Secretary of the Treasury are well placed to guide the Board in these respects.

Within those strictures, nevertheless, the Board still has a potentially very wide ambit in terms of issues it can address. In particular, the Board's key functions, as set out in its Charter, are to advise the Treasurer on:

• the quality and effectiveness of tax legislation and the processes for its development, including the processes of community consultation and other aspects of tax design;

• improvements to the general integrity and functioning of the taxation system;

• research and other studies commissioned by the Board on topics approved or referred by the Treasurer; and

• other taxation matters referred to the Board by the Treasurer.

Tax Legislation and its Development

The first of the Board's functions specified in its Charter is to advise the Treasurer on the "quality and effectiveness of tax legislation and the processes for its development, including the processes of community consultation and other aspects of tax design."

In conjunction with its Mission Statement, this should be interpreted as giving the Board two key roles:

•First, to facilitate, once a policy direction or intent has been determined by the Government, full and effective community consultation and other relevant input to the ensuing processes of legislative development and implementation; and

•Second, to facilitate and/or undertake evaluation of the "quality and effectiveness" of the resulting legislative product and implementation procedures, etc.

The objective, of course, is to achieve better legislative and implementation outcomes, including in terms of those outcomes:

• correctly reflecting the policy intent;

• being compatible with commercial realities and the circumstances of individuals;

• minimising complexities and resulting compliance costs; and/or

• avoiding unintended consequences.

In performing its role of facilitating community consultation in tax design and implementation, it is important to recognise that the Board itself generally will not be engaging in such consultation. Rather, the Board's main purpose in this area is to provide advice to the Government on processes and procedures needed to facilitate the full and effective input of all legitimate community interests in an issue. That said, the Board itself will on occasion engage directly in consulting relevant interest groups, such as in the case of the possible development of the Tax Value Method (as requested by the Treasurer) and consistent with its role of advising on the quality and effectiveness of tax legislation.

Advice on Integrity and Operation of the Tax System

The second function of the Board is to advise the Treasurer on "improvements to the general integrity and operation of the Taxation system." In this context, there is no doubt that the Board will continually be appraised of a wide range of views, concerns and ideas about the operation of the tax system, including:

• through general submissions and representations to it;

• through the networking and/or lobbying of its members;

• through inquiries the Board may itself undertake; and

• through being informed of the Government's own priorities and objectives.

It will then be a matter for the Board, of course, to determine which issues it may wish to pursue. Where the Board decides to take up an issue, the process generally will require that it be referred to the Treasurer in the first instance. It would then be for the Treasurer to decide whether or not it is a matter that should be considered further, and whether the Board should have any role in that process.

Clearly, there will be a significant element of judgement involved in deciding matters the Board may wish to take up. The overriding criterion, nevertheless, will be whether, in its view, the Board is in a position to "add value" to the consideration of an issue. In essence, this will involve a judgement as to whether the Board can provide or facilitate better insights or emphasis to an issue than what would already be available to the Government.

Advice on Issues Referred by the Treasurer

A third key function of the Board is to progress issues referred to it by the Treasurer. The mandate the Treasurer gave to the Board on 7 August 2000 to progress the development and testing of the Tax Value Method for determining taxable income is an obvious example.

Current Activities of the Board

The Board's focus to date has been on three main areas:

1. Progression of the possible development of the Tax Value Method (the TVM), which, as noted, the Treasurer has expressly asked the Board to advise on.

2. Secondly, to commission a comprehensive assessment of current and prospective arrangements by which the community is consulted in the course of the development and implementation of tax laws, possibly as part of new processes by which taxation laws are developed.

3. Thirdly, to assess and advise on issues of community concern relating to aspects of the governments' business tax reform agenda.

In addition to these areas, the Board, has been refining its thinking on its processes of operation and likely priority areas going forward.

Tax Value Method

Turning to the Tax Value Method (or TVM), I am sure that most of you will be at least aware of this idea and its origins, and the fact that the Board has been assigned the task of proving its merits (or otherwise).

The TVM was a recommendation of the Ralph Review and the rationale for it arose from the strong view that the existing law's central tenets of ordinary income, statutory income and the capital/revenue distinction create uncertainty and complexity. The TVM involves restructuring the income tax law around a common conceptual platform with the objective of achieving greater legislative certainty, transparency and integrity, among other things.

The Board developed a two-pronged strategy for progressing the development and evaluation of the TVM:

1. Stage 1 is the development of a draft legislative framework sufficient to comprehensively demonstrate and test the concept. It is intended that this drafting will be informed by the application of extensive real world transactional information to test the TVM's conceptual foundations and robustness.

2. Stage 2 is focused on evaluating and quantifying the costs and other aspects of compliance, along with other potentially important features of TVM-based law. This too will be informed through real world case study analysis where feasible.

To achieve these goals, the Board established two key operating structures:

The first is a TVM Legislative Group, which is charged with the task of actually drafting the legislation. This group is centered within the ATO but includes resources from the Treasury, OPC and the private sector.

The TVM Legislative Group has now drafted most of the core TVM rules, together with explanatory materials and worked examples, which many of you will have seen from the Board's website. The development of other important rules such as CGT, private/domestic rules and taxation of non-residents is currently well under way, with a view to a possible release of the entire TVM "demonstration package" towards the end of this year. This release will provide the basis for further testing and evaluation of the TVM system.

The second operating structure established by the Board is the TVM Working Group, which is intended to be a source of expert advice to the TVM Legislative Group in terms of identifying issues and suggesting solutions to problems that emerge as drafting of the legislation progresses. This group, which is chaired by Chris Jordan, is comprised of tax experts drawn from the tax practitioner, accounting, corporate finance, legal and academic spheres.

These experts are free to, and are in fact encouraged to, consult broadly with their constituent groups and with the business community in general to bring ideas to the TVM table. The draft TVM rules prepared by the TVM Working Group have been

the subject of much discussion and review by the TVM Working Group at its recent meetings, of which there have been four so far.

In order to test the TVM, preliminary trialling of the core TVM rules has been undertaken with the assistance of BHP-Billiton, Telstra and Australia Post, with the aim of ascertaining the ease of application of the proposed TVM provisions and comparing the TVM tax outcomes with the tax treatment under the current law. TVM testing has also been extended to Small and Medium Enterprise in order to identify any "unique" transactions that may not be captured in a large firm context.

The results of the testing to date were presented at our recent TVM Consultative Conference in July. There are a number of things which I would like to say about these results. Firstly, I want to emphasise that the testing was of a pilot nature to provide comfort that there were no fatal flaws in the TVM concept and to otherwise elicit issues that would inform and assist the legislative drafting process. Furthermore, many issues that arose from the testing were the result of incomplete or missing legislation, rather than from any inherent flaws in the TVM methodology.

Using the experience gained from this testing, the Board intends to sponsor or otherwise promote a good deal more testing across a broader range of industries, sectors and individuals, as the legislation becomes more developed.

It is evident from the TVM conference, and from the Board's on-going discussions with stakeholders, that while further development and testing of the draft legislation is needed, greater emphasis must now be given to further articulation and, where possible, quantification of the potential relative benefits of the TVM. These would include in terms of tax design and ongoing integrity and maintenance of the law (associated with greater certainty and transparency), as well as tangible quantifiable benefits to users of the TVM system.

It is envisaged that sufficiently comprehensive draft legislation should be ready for public release by the end of this calendar year. This package will not be a complete redraft of the law, but will be sufficient to allow for independent assessment and evaluation of the concept, and hopefully, an informed and objective public debate such that a definitive conclusion as to the TVM's relative merits can be reached.

Consistent with the Board's open and inclusive approach to the TVM, the Board will continue to release information via its website and will be sponsoring further consultative events on the TVM, as well as continually seeking full and open engagement with all stakeholders in the process.

Consultative Arrangements

Implementation of the Government's business tax reforms, and tax reform more generally, has involved consultation with the private sector on an unprecedented scale. The Board has heard from key private sector stakeholders that recent years have seen a major and welcome advance for consultation. At the same time, the

Board has heard there is still some way for the Government to go in getting consultation right.

Some of the specific concerns that have been raised include:

• The (apparent) ad hoc selection of both people and topics for consultation.

• The extensive use of confidentiality agreements.

• Consultation taking place too late.

• A lack of accountability and feedback.

By no means are these views justified or relevant in all cases but they are representative of the types of general concerns that the Board is hearing.

Consequently, a key area of the Board's focus to date has been on reviewing the processes by which the community, or at least relevant key interest groups within the community, are consulted in the course of developing Australia's tax laws. The Board sees this project as being quite critical to laying the foundations to its on-going role of ensuring effective community input to the tax design process.

Our objective is to develop "best practice" community consultative processes, recognising the range of circumstances in which tax laws can be developed. It is hoped that, if adopted, these processes would then provide the basis or guidance by which the Board can fulfil a key part of its function to advise the Treasurer on the quality and effectiveness of tax legislation and the processes for its development.

The first stage of the review has been the commissioning of KPMG to prepare a report that:

• Documents existing consultative processes;

• Surveys stakeholder views about the relative strengths and weaknesses of current approaches and ideas about potential future processes, including, importantly, the role the Board should play in them;

• Assesses practices in select overseas jurisdictions (New Zealand, UK, Canada, Ireland, US); and

• Reviews processes used in the development of other Commonwealth and State Government (non-tax) laws.

KPMG has met with key stakeholder groups and surveyed over 600 organisations for their views on the strengths and weaknesses of current consultation arrangements and opportunities for improvement. The Board expects to receive KPMG's report in September 2001, and the preliminary feedback received to date indicates that, as with the TVM process, there is strong support for this consultation process and more generally for the goal of developing effective consultation mechanisms.

The best practice approaches to consultation identified by KPMG potentially might be endorsed by the Government and/or adopted as part of new "integrated tax design" processes now being developed between the Australian Tax Office, the Treasury and the Office of the Parliamentary Counsel. I myself have joined a High Level Steering Group which currently oversights this process. In addition, the Board would clearly have an ongoing role in monitoring adherence to any best practices endorsed by Government.

Business Tax Reform

At the time of the Board's establishment last August, it was generally considered that the Board would play little (if any) role in advising on the Government's five major initiatives of Entity Tax, Consolidation, the Simplified Tax System, Capital Allowances and the Thin Capitalisation and Debt/Equity Measures.

The view then was that processes, including of consultation, on these measures were too far advanced for the Board to be able to add much, if any, value. However, as relevant decisions continued to be deferred, the Board was drawn into the debate surrounding some of these measures. There have, of course, been a great many issues raised by, and a good deal of controversy surrounding, major features of the Government's proposed business tax reforms. The Board has proffered its advice to the Treasurer where it has deemed that the circumstances have been warranted.

Reflecting deep public concerns that Board members were detecting from their own networks, and from their discussions with the accounting profession, the Board was moved, in particular, to recommend to the Treasurer in February that he defer implementation of the Government's proposed "entities" and "consolidated companies" taxation regimes and to consider generally revising the implementation timeframes for other key remaining elements of the reform agenda. This the Treasurer ultimately announced, in the process flagging that the Board may have a

role in the further consideration that is to be given to such issues and in the consultative processes associated with other remaining business tax reform measures.

Precisely what role the Board will play is still not entirely clear, and will probably vary depending on the particular issue in question. The bottom line is that the Board is moving to ensure that it is fully versed in the relevant issues, from both public and private sector perspectives.

Other aspects of the Board's function

The Board has also been considering the processes and systems it could adopt on an ongoing basis to perform its key functions of advising on the "quality and effectiveness of tax legislation," and "integrity and functioning of the tax system." Inevitably, this sort of work undertaken by the Board does take a good deal of time and, by its nature, is not publicly visible.

Quality and effectiveness of tax legislation and the processes for its development

The Board is considering adopting a case study approach for reviewing the quality and effectiveness of legislation, with its immediate objective being to formulate advice to the Treasurer on both the processes by which the legislation was developed and any improvements that could be made to the operation of the laws in question. The processes that might be adopted for the conduct of such case studies, including the development of appropriate benchmarks/criteria for assessing tax legislation, are still under consideration. A longer term goal might be to institutionalise more systemic processes for the review of tax legislation.

The Board has also given preliminary consideration to its own role in the development phase of tax legislation. It is anticipated that the review of consultative arrangements will provide an indication of tax system stakeholders' views on these issues.

Integrity and functioning of the tax system

In developing its views on the integrity and functioning of the tax system, the Board strongly emphasises the importance of establishing and maintaining strong and open lines of communication with key stakeholder groups. The intention is to remain well-informed of the major concerns and emerging issues in the community in relation to the operation of the tax system, and to provide advice to the Treasurer accordingly.

The very composition of the Board, bringing together senior representatives from the Treasury, ATO and the Office of Parliamentary Counsel with business representatives, will in of itself help to develop and strengthen the links and trust between business and key government agencies

Already, the Board has instituted, in conjunction with its regular monthly meetings, a program of meetings with key stakeholder representatives. These meetings are intended to give the Board some early indication of community concerns with, and priorities for, the tax system.

Individual Board members have also been very active in participating in conferences, seminars and the like, and in consulting through their networks on tax issues.

Concluding Remarks

In conclusion, in addition to progressing the TVM and community consultation projects, the Board will further develop its role in the Government's business tax reform process where appropriate. The Board will also continue its processes of directly liaising with community groups and in otherwise seeking to keep itself informed of the issues from both a public and private sector perspective. I expect these sorts of meetings to be a continuing feature of the Board's activities, both to inform it of concerns with current tax reform initiatives and to allow it to gauge community concerns and priorities for the tax system generally.

There are, however, obvious limits to what the Board itself can do in the way of direct discussions, so it will also rely heavily on the information that comes to it via submissions and through the networks of its members. I therefore encourage the Institute to be proactive in terms of keeping the Board informed of your major concerns and ideas for the tax system.

In saying that, however, I do want to stress that the Board is not a lobby group for business. It is quite clearly a conduit - and hopefully a transparent and effective conduit - for business groups to be able to ensure their views are thoroughly aired and discussed within Treasury and ATO but it will not necessarily champion any specific viewpoint on behalf of a particular group.

By the same token, I trust the Board will also be an effective conduit for the Government's points of view to be put to the business community.

In my view (and I hope that you also have this impression), the Board has been very active in its first year and is looking to maintain a very proactive agenda. Quintessentially, the Board's overriding mission is to facilitate a better community-Government interface. I hope that the Board's contribution to this end will become increasingly evident in the second year of its operation.

Thank you.