THE TAXATION INSTITUTE OF AUSTRALIA
16TH NATIONAL CONVENTION, CANBERRA
14 - 16 MARCH 2002

'UPDATE ON CURRENT ISSUES BEFORE THE BOARD OF TAXATION'

PRESENTATION BY MR DICK WARBURTON
CHAIRMAN OF THE BOARD OF TAXATION
9am FRIDAY 15 MARCH 2002

Introduction

Thank you.

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

I last spoke to the Institute at its Victorian conference in Lorne on 31 August last year. The Institute also featured an interview between Alice McCleary and myself in the last October edition of Taxation in Australia. The Board also met with Alice and representatives from other peak organisations in January this year.

As the chairman of the Board, I must say that I am pleased with the interest the Institute has shown in the Board and its work.

I have been asked to speak about some of the specific activities of the Board to date and its priorities going forward.

As many of you will be aware, the Board's focus to date has been on three main areas:

• progressing the development of the TVM
• developing effective consultation processes that can deliver better tax law;
• advising on and assisting the Government with its tax reform agenda.
  

I will spend some time on each of these topics and flag some future areas of Board work, before moving on to invite questions.

Before doing so, however, it might be useful for me briefly to provide some background on the Board of Taxation.

The Board has now been in operation for some eighteen months.

The Government established the Board in response to a recommendation of the 1999 Ralph Review of Business Taxation, which was concerned that the views of business were not being effectively heard in the development of taxation laws.

The Board's operations are governed by its Charter, which is available on its web site.

Broadly speaking, the Board's role is to contribute, in the broadest possible terms, to better tax system outcomes by facilitating a more effective business and broader community input into the development and implementation of tax laws.

It is important to recognise that the Board is purely an advisory body to the Treasurer and the Government. It has no mandate to determine, or indeed to lead public debate on, taxation policy matters unless otherwise authorised by the Treasurer. Nor does it have any power of direction over the Commissioner of Taxation.

The Board receives a modest budget of $2 million annually, and is serviced by a small secretariat based in Canberra.

Its seven non-government members, including myself, are appointed part-time. It has three further ex-officio members, being the heads of the Treasury, the ATO and the Office of Parliamentary Counsel. The Board generally meets at least once a month.

Clearly, modest resourcing and time constraints on members dictate that the Board, for the most part, must maintain its focus on the broader, strategic issues impacting on the tax system - for example, on ensuring that the right processes for developing and implementing tax laws are established and sustained - and on advising and assisting the Government with more major tax policy initiatives or issues.

In fulfilling its role, the Board's strategy to date has been to draw on private sector expertise for specific projects whenever feasible. By doing so, the Board is seeking to bring a more relevant commercial perspective than might otherwise have been possible through a larger secretariat.

I now turn to the Tax Value Method.

TAX VALUE METHOD

As many here will know, furthering the development and evaluation of the Tax Value Method has been a major focus of the Board since its inception.

Indeed, it was the first task the Treasurer assigned to the Board when he announced its establishment in August 2000.

At that time, the Treasurer noted that the TVM, if properly implemented, has the potential to underwrite the development of a stable, less ambiguous and more understandable income tax system - a system that would be more readily conducive to manageable ongoing development in the future.

At the same time, however, the Treasurer also acknowledged that many detailed issues would need to be resolved before possible implementation of the TVM could be considered, and that this would require ongoing consultation with all key affected sectors of the community.

Many of you will recall that prior to the issue being referred to the Board, there had already been extensive public debate on the TVM - I certainly do!

While I think there were many at that time who believed that the idea had conceptual merit, the majority view clearly was that there was insufficient information available to judge the practicalities of going down the TVM path.

Against that background, the Board determined a strategy for its further development and evaluation of the TVM which:

• First, focussed on developing further the facts about the TVM; and
• Second, promoted or sponsored the progressive testing and evaluation of the concept, with an emphasis on road testing in partnership with companies and tax practitioners.
  

The Board also determined that its processes for developing and evaluating the TVM should be both open and inclusive of all stakeholders.

When the Board embarked on this exercise, it established two groups to assist it.

The first is a small TVM Legislative Group charged with developing the TVM demonstration legislation and associated explanatory material. Led by Andrew England of the ATO, and advised by Paul Abbey of Shaddick & Spence, its other members are drawn from the ATO and Treasury.

The second is a larger TVM Working Group, whose membership includes the key members of the Legislative Group plus some 19 non-government sector tax experts drawn from the accounting, tax advising, corporate and academic spheres. This group has been responsible for assisting with the development of the draft legislation and also in assisting with the evaluation of the TVM.

The members of the Working Group have been free to liaise more generally with others in the community, and all information generated from the process has been exposed publicly on the Board's web site as and when it has become available.

Four prototypes of TVM demonstration have in fact been produced so far and made available through the Board's web site: each new prototype refining and adding to the former.

The Board also set itself a timeframe of broadly some eighteen months in which to complete its work, targeting around the middle of this year as the time by which it would present its findings and recommendations to the Treasurer.

We have since adhered faithfully to this strategy and timeframe, which I think remains on track.

The culmination of the Board's work done to date is the package of material released publicly in Sydney last week. In particular, at the Board's 6 March Consultative Briefing, we released four key publications:

• A TVM overview document, providing what I would term an "executive summary" of the concept and what it seeks to achieve;
• A more detailed TVM Information Paper that provides very comprehensive information about what the TVM is, the rationale for considering the idea, and what the key benefits of adopting it might be;
• The fourth prototype of draft TVM legislation, intended to demonstrate and assist in assessing the practical application of the TVM; and
• Explanatory Material to the prototype legislation, which also gives guidance as to how some important but as yet undrafted parts of the current law would be encapsulated in a TVM framework.
  

By any stretch of the imagination, this is a very comprehensive package of demonstration and explanatory materials.

Indeed, for a policy matter that has not yet been decided by a government, it is probably the most comprehensive package of its type ever assembled in Australia.

The Board's intent is that it should provide the basis on which everyone with an interest can now proceed in objectively assessing the TVM's relative merits.

I would stress here the words "objectively assess." We have all, of course, had to cope with a great deal of tax reform in the past couple of years and for many this is a continuing state of affairs; for example, in coming to grips with the new companies consolidations legislation.

There is clearly tax reform fatigue out there - and a good deal of emotion about the less than perfect way in which some of the major reforms have been implemented.

So it is quite understandable that there will be a good deal of emotion and scepticism pervading about the prospects of such a major and fundamental reform that the TVM would represent. What we are asking, however, is for people to move beyond this - and to objectively assess all of the issues on their respective merits.

The Board is asking for public submissions to be lodged with it by the end of April.

As we now move into what I would term this intensive public consultation phase, the Board will be continuing to sponsor work it currently has in train with people from the Sydney, Melbourne and Australian National Universities aimed at further testing and evaluating the potential costs and other aspects of compliance with income tax law based on the TVM.

In particular, the Board has commissioned Associate Professor Chris Evans, Director of the Australian Taxation Studies Program at UNSW, to provide an independent and indicative evaluation of the transitional compliance costs and recurrent compliance costs or benefits of the TVM for business taxpayers.

The Board has also commissioned Professor Graeme Cooper of Melbourne University and Dr Michael Wenzel of the Australian National University to broadly evaluate the compliance aspects of TVM based law.

Basically, this research seeks to elicit a quantifiable measure of the extent to which the TVM might reduce uncertainty about potential tax outcomes. For example, would the TVM methodology lead to fewer disputes about the correct tax treatment of some transactions?

The results of these studies will also be placed on the Board's web site when they become available, hopefully later this month.

The Board will also be sponsoring further work in this area in conjunction with tax practitioners and others.

As well, the Board is continuing to sponsor a group of practitioners involved in its TVM Working Group in developing possible alternative models for restructuring the present income tax law, which might deliver many of the benefits promised by the TVM. This work, I would stress, is still at a very early stage.

Obviously, the Board will continue to engage openly with all key stakeholders as processes progress from here.

In this context, I would mention that the Board's TVM experts within the Australian Tax Office, the Treasury and elsewhere stand ready to assist in responding to particular questions people may have, or to issues they may want to raise, and to otherwise assist community understanding of the TVM concept.

Indeed, I see that two members of the Legislative Group, Andrew England and Paul Abbey, will be talking later today about the Tax Value Method.

The Board will also be looking to further direct engagement with key stakeholders in the lead up to formulating its recommendations to the Government by end June.

As I see it, the critical issue that we need to determine is not whether there should be a fundamental restructuring and reform of our current income tax law, but rather, whether the TVM is the most appropriate platform or vehicle for effecting this reform.

And it is to that fundamental question that the Board would like to see submissions addressed.

I would stress that, at this stage, the Board continues to have an open mind about the relative merits of the TVM. I suspect, however, that there is at least one issue we are all agreed on. I detect, in particular, no argument that the current law, rooted in the realities of an era long gone, is far too complex and voluminous relative to what it is supposed to achieve.

Of course, we are not alone in having this problem. I note that the United States also has recently indicated an intention to explore means of simplifying its income tax laws, which many would regard as being at the pinnacle of complexity among the developed nations.
On 25 February this year the Secretary to the US Treasury, Mr Paul O'Neill, mentioned in an address to the US Chamber of Commerce that the complexity of the US tax code strangles US prosperity. He noted that it is a drag on the ability to create new jobs in the USA.

I suspect the same is true for Australia.

So whether or not the TVM is the answer, achieving a simpler, more coherent and logical legislative framework is a task that must somehow be done.

CONSULTATION IN DEVELOPING AND IMPLEMENTING TAX LAWS

Ladies and gentleman, I think a hallmark of the Board's TVM evaluation strategy has been the extent of the openness and inclusiveness with which it has been pursued.

This approach has contributed enormously, and will continue to contribute enormously, to the development and understanding of the TVM.

An additional benefit, however, has been that it has also provided a lot of useful insights to possible best practices in the way the community is consulted more generally in the course of developing and implementing our tax laws.

As most here will know, another issue that has consumed a great deal of the Board's time and energy since its inception has been its evaluation and assessment of arrangements by which the community is consulted or otherwise engaged in the processes of developing and implementing our tax laws.

Many here will have participated in the extensive community consultation that the Board commissioned through KPMG Consulting last year aimed at identifying the issues with current community consultation processes and in garnering ideas as to what might constitute best practice in the future.

The Board received KPMG's final report in October last year and has since been distilling its own views and the recommendations it proposes to make to the Government in this area.

No doubt, there would be little argument in an audience like this that the development of effective and productive business and broader community consultation arrangements is essential to achieving good tax law outcomes in Australia. And it is an area central to the Board's purpose and on-going role.

As such, the Board has given very detailed and thorough thought to all the issues involved, and this inevitably has taken a good deal of time.

I am now happy to say, however, that we expect to be in a position to present our report and recommendations to the Treasurer and the Minister for Revenue and Assistant Treasurer within the next week or so.

It is not possible for me to pre-empt the Board's findings and recommendations in any way - since they obviously are a matter for the Treasurer and Minister to consider in the first instance.

It can be no secret, however, that the Board will in its recommendations be looking to address key problems that were revealed from the KPMG project. And I think there would be a strong consensus in this audience as to what those problems are.

Among the key concerns to emerge were:

• First, problems with accountabilities in the legislative design process, and concerns about the role of the ATO.
• Second, insufficient timeframes for consultation in many instances, often leading to doubt about how genuine the processes in fact were.
• There are also concerns with the lack of clarity about the government's underlying policy intent, and the purposes of the consultations being pursued
• Finally, participants in consultative processes have voiced concerns about the lack of feedback on outcomes.
  

Obviously, in finalising its recommendations the Board also has given considerable thought to the need to balance these sorts of concerns and problems with the realities and strictures of government and the operations of the marketplace.

I believe, however, that what the Board will be recommending does strike the right balances in these respects, while still laying the foundations for achieving substantially better tax outcomes for Australia.

It would be remiss of me also not to observe that we have, in fact, already witnessed some significant developments in consultative processes in recent times, and which build upon the improvements that have flowed from the Ralph Business Review processes.

Indeed, I would have to say that the processes the Minister for Revenue and Assistant Treasurer is currently pursuing in relation to the development of the company consolidations legislation would go a very long way to satisfying those that the Board will be recommending.

I think we should all commend the Minister for her efforts.

BUSINESS TAX REFORM

As mentioned at the outset, a third area of major focus by the Board has been in advising on and assisting the Government with its business tax reform agenda.

When the Board was established in August 2000, the consensus was that the Government's remaining major business tax reforms were too far advanced for the Board to play any meaningful advisory role.

Processes, including of community consultation, for progressing most of these measures were well advanced at the time the Board was established. However, as relevant decisions continued to be deferred, the Board was inevitably drawn into the strong public debate surrounding some of them.

Many of you will be aware that the Board advised the Treasurer in February last year to defer implementing the proposed "entities" and "consolidated companies" taxation regimes, then to commence in July 2001. The Treasurer accepted this advice, which he announced later that month.

At the same time, he indicated that the Board would have a role in the further consideration that is to be given to the taxation of trusts, and in the consultative processes associated with other remaining business tax reform measures.

Entity taxation

On the issue of Entities Taxation, or more particularly, the appropriate tax treatment of trusts, the Board has essentially gone back to a "clean sheet" of paper and to explore what are the essential issues with the assistance of the Treasury, the ATO and a number of external advisers and experts in the field.

To the extent that issues requiring a response are identified, the Board is also looking for advice from this internal group as to what the potential options might be. Once informed in these respects, and itself having considered the issues, the intention is for the Board to submit advice to the Treasurer with a view to the issues and possible options then being canvassed more broadly with stakeholders.

I note that Alice McCleary wrote in the recent February edition of Taxation in Australia that "whatever emerges from the [Board's] deliberations, it is likely to be controversial." I think we should wait and see about that!

Consolidation regime

The Board has been active in assisting in the development of the Government's companies consolidation legislation.

At the request of the ATO, the Board appointed a former president of the TIA, Mr Ken Spence, to help the group oversighting this project. I believe this proved to be enormously successful.

The feedback the Board has received suggests, in particular, that Ken played an extremely valuable role in contributing his technical and commercial expertise to the shaping of the package and in successfully alerting to the pitfalls of some key elements or approaches that might otherwise have been pursued.

It potentially provides a model for future exercises of this sort.

THE FUTURE

Looking ahead, I can see at least two further specific areas of legislative or system reform in which the Board likely will play a significant role

The first of these relates to the Government's election commitment to establish a new office of Inspector General of Taxation.

The Government has signalled, in particular, that it will be asking the Board to coordinate public consultation on its proposals for the role and powers of the Inspector General of Taxation and that it will be separately seeking the Board's own advice on the issue.

Board Member Associate Professor Alison McClelland has accepted the role of heading up the Board's processes in this exercise.

The Board also expects to take an active and significant role in assisting with the Government's forthcoming review of Australia's international taxation arrangements, by far and away the most significant area of unfinished business flowing from the Ralph Review.

Of course, the Board also will be continuing more generally to pursue, in line with its available resources and priorities, its Charter functions of advising on the quality and effectiveness of legislative outcome and on the general functioning and integrity of the tax system.

To this end we will be continuing to meet with community stakeholder groups and otherwise to maintain and expand our links into the community.

CONCLUDING REMARKS

Evident from all I have said is that the Board of Taxation is and remains very active in pursuing its Charter to enhance enhancing community input to the processes for developing and implementing taxation legislation.

A lot of the Board's work to date, apart from the TVM, has not been visible to the general community, but I believe that will change significantly as we move forward.

I continue to look to the support of the tax practitioner fraternity, and of the TIA in particular, as we continue to strive for good tax law and system outcomes for Australia.

Thank you for listening.