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THE TAXATION INSTITUTE OF AUSTRALIA
2002 VICTORIAN STATE CONVENTION, MELBOURNE
12 SEPTEMBER 2002 TO 13 SEPTEMBER 2002
`UPDATE ON CURRENT ISSUES BEFORE THE BOARD OF TAXATION'
PRESENTATION BY MR CHRIS JORDAN
MEMBER OF THE BOARD OF TAXATION
8.30AM FRIDAY 13 SEPTEMBER 2002
Thank you.
Good morning ladies and gentlemen. I would like to thank the Taxation Institute of Australia for inviting me to its annual Victorian State Convention to talk to you today.
The Chairman of the Board of Taxation was last invited to the Institute at its national convention in Canberra held in March this year, where he spoke about the Board's activities and its future program. I recall that the Chairman also spoke to the Institute in 2001 Victorian Convention in August last year held in Lorne.
My presentation today, therefore, is one of a number of presentations delivered by Board members to Institute's conventions. Since I have been asked to speak about the same topic regarding some of Board's current activities and its priorities going forward, I'll keep my talk today in a similar format as those previously given by the Board.
Needless to say, I am pleased with the ongoing interest the Institute has shown in the Board and its work.
The Board's major focus (since the last update in March) has been on:
- evaluation of the Tax Value Method and its recommendation to the Government;
- conducting community consultations and providing recommendations to the Government on the establishment of an office of Inspector-General of Taxation;
- establishment of Advisory Panel for the Board;
- preparing recommendations to the Government on entity taxation, in particular trusts.
More recently, the Board has embarked on its consultation on:
- Review of International Taxation Arrangements. The Board will prepare a report to the Government containing details of consultation results and Board's recommendations.
I will briefly address each of the first four topics. Then, I will give you an insight into the Board's current consultation processes planned for the Review of International Taxation Arrangements, which will be the focus of my talk today.
At the end, I will flag some future areas of work for the Board before moving on to invite questions.
Before doing so, however, it might be useful for me to briefly recast some background to the Board of Taxation for the benefit of those who may be unfamiliar with the Board's history.
The Board has now been in operation for two years. To be precise, tomorrow (14 September 2002) will be Board's second anniversary.
The Government established the Board in response to one of Ralph recommendations, which arose from public concern 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 Website.
Broadly speaking, the Board's role is to contribute community input into the development and implementation of tax laws.
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.
The Board receives a modest budget of $2 million annually, and is serviced by a small team of Secretariat within the Treasury.
In fulfilling its role, the Board's strategy to date has been to draw on private sector expertise (both industry and professional) for specific projects whenever feasible. The Board also has recently established an Advisory Panel, which will be additional resources for expert advice to the Board.
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, who has an absolute discretion in the day to day administration of the tax law.
I now turn to current activities that have been focused by the Board.
Most of you would be aware by now that, on 30 August 2002, the Board announced the release of its report to the Government on its evaluation of the TVM, and that the Government has accepted the Board's recommendation not to proceed with TVM. This effectively brings official closure to the recommendation of the Ralph Review of Business Taxation on TVM.
The development and evaluation of the TVM had been a major focus of the Board since its inception in 2000, and the Board carried out the due consultation process, which was explained to the Institute members in more detail by the Chairman of the Board in March this year.
The Board had a timeframe of some eighteen months in which to complete its work, and after an extensive level of consultation process, the Board submitted its final report to the Government on 9 July 02.
Most submissions received from the community recommended against further development work being undertaken on the TVM.
While there was general acknowledgment that the current income tax law is overly complex and in need of substantial restructuring and simplification, the overwhelming view was that adoption of the TVM was not the means to achieving these ends.
The essential concern was that, while offering benefits in some areas, the TVM could generate greater complexity and uncertainty in others. As such, most stakeholders believed that the on-going benefits of adopting the concept are, at best, uncertain and certainly unproven.
Adding to this is the prospect that adopting the TVM would result in substantial transitional costs, most notably for tax advisers who would both lose substantial human capital invested in the current system and be required similarly to invest in their knowledge and understanding of TVM based law.
A clear sentiment of tax reform fatigue, a good deal of emotion and scepticism pervading about the prospects of such a major and fundamental reform, and a good deal of emotion out in the community about the less than perfect way in which some of the major reforms have been implemented were the major influencing factors for the Board's final recommendation to the Government.
All key interest stakeholders acknowledged, however, that the work involved in further developing and testing the TVM had given valuable insights into how aspects of the current tax law might be amended and restructured to deliver many of the benefits that the TVM promised.
The Board also considers that there is merit in a further process aimed at exploring possibilities for improving the current law. There are, in particular, strong national interest reasons for pursuing a more coherent income tax law, and in a longer term, I am hoping that the Board will be able to contribute to this process.
To all those who participated in the TVM consultation processes, I (on behalf of the Board) thank for their efforts in assisting the Board.
One of the Government's election commitments was to establish a new office of Inspector General of Taxation to strengthen the advice it receives about tax administration and process.
In May this year, when the Government released a consultation paper setting out the Government's new office of Inspector-General of Taxation, it asked the Board to coordinate public consultation on its proposals for the role and powers of Inspector General of Taxation. The Government also asked for the Board's own advice on the issue.
A former Board Member, Associate Professor Alison McClelland, took the main carriage of Board's consultation processes, and the Board report containing its consultation findings and recommendations has been submitted to the Government on 19 July 2002.
The Government is yet to deliberate its decision on Board's recommendations, and clearly I am not in a position to discuss the details of the report here. However, I may be able to refer you to the recent comments made by the Minister for Revenue and Assistant Treasurer on Inspector-General in her speech addressed to the Challis Tax Discussion Group on 26 July 02.
The Minister indicated that the Inspector-General will focus on identifying and recommending solutions to systemic problems in tax administration. She also indicated that the Inspector-General will not take over any existing functions of the offices of the Ombudsman or the Auditor General.
I understand that the role of the Inspector-General is to enhance Government's ability to respond quickly to more serious tax administration problems.
The Board has established a high level advisory panel to assist it in the general performance of its role. The Panel draws together 23 of Australia's leading taxation professionals who have agreed voluntarily to contribute their knowledge and expertise in assisting the Board with its work.
They will provide a standing, ready source of high level expert advice on which the Board quickly could draw in the course of considering all manner of taxation issues likely to come before it.
As such, the Panel will provide a very important additional source of advice to the Board to that provided by the business, professional and other community representative organisations with whom the Board has already developed close working relations.
The Panel will also assist the Board in maintaining on-going effective links into the community for the purpose of understanding taxpayer concerns and priorities. As with the public more generally, panel members have been encouraged individually or collectively to alert the Board to issues they think it should be considering.
The Panel will operate on an ad hoc and strictly informal basis, designed to facilitate open and frank exchanges of views.
Many of you are 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, the Treasurer indicated that the Board would have a role in further considering the entities taxation issues, or more particularly the appropriate tax treatment of discretionary trusts, and in the consultative processes associated with other remaining business tax reform measures.
On the issue of taxation of trust, the Board essentially has gone back to a "clean sheet" of paper. With the assistance of the Treasury, the ATO and a number of external advisers and experts in the field, the Board has explored what are the essential issues on this issue. The Board will finalise its position in the near future prior to submitting its advice containing several options to the Treasurer.
It has not been easy, however, for the Board to deliberate its final position. The Board has found it difficult in defining the solution to satisfy every group. This has not been made easier by a lack of acceptance of the real mischief or perceived abuse. Income splitting capabilities through trusts seem to be the focus of attention by some groups whereas the Government has stated that is not the structural issue to be dealt with. In any event, the income splitting issue goes beyond trusts and can be achieved by partnerships, family companies, or by a simple alienation of income.
REVIEW OF INTERNATIONAL TAXATION ARRANGEMENTS
On 22 August 02, the Government released the consultation paper prepared by the Treasury on the Review of International Taxation Arrangements.
This consultation paper, which is available on Board's Website, represents the first stage in fulfilling the Government's commitment announced in Securing Australia's Prosperity to review aspects of Australia's international taxation arrangements - by far, the most significant area of unfinished business flowing from the Ralph Review.
[Slide 15 - RITA - Consultation Paper]
The consultation paper states that its broad object is to identify the possible impediments to Australian companies expanding offshore, attracting domestic and foreign equity, and affecting holding companies and conduit holdings from locating in Australia.
The consultation paper further states that to maintain Australia's status as an attractive place for business and investment, the tax system needs to continually adapt to the increasingly integrated global business environment.
As part of the consultative processes associated with other remaining business tax reform measures, the Treasurer asked the Board to consult extensively on the paper, consider the views put forward, and provide its recommendations to the Government together with a report on the outcome of the consultations.
The Board has established a Working Group comprising Messrs Tony D'Aloisio (Chair), Brett Heading and myself to oversee its work on the review and to have day-to-day carriage of the Board's work on this project.
The Board agreed that its task is to prepare a report to the Government that:
(a) fairly conveys the issues or ideas held by stakeholders in relation to Australia's international taxation arrangements, particularly those mentioned in the consultation paper ("the consultation project"); and
(b) makes the Board's own recommendations in response to the issues raised by the consultation paper and stakeholders ("the recommendations project").
While the two projects are inherently inter-related, in that the issues and ideas raised by stakeholders will inform the Board's own thinking, the Working Group considers that they will require a separate focus. In particular, the Board may need to commission its own sources of advice, independent of stakeholders, in arriving at its recommendations.
The public submissions are due by 31 October 2002, and the Treasurer has asked the Board to report to the Government by 31 December 2002.
The Working Group has met with some stakeholders on 2 September 2002 to discuss and distil critical issues from the options contained in the consultation paper. The purpose of the meeting was to:
(a) identify the key issues with industry expertise (the issues that will really matter to advance Australia's international competitiveness);
(b) identify the less important issues;
(c) prepare for the consultative briefing seminar planned for 30 September 2002.
The Board has been in contact with a number of individuals and organisations who have expressed an interest in the consultation paper, or whom the Board considers may have an interest in the paper, to advise them that the consultation paper is available for public comment.
To facilitate the preparation of submissions, the Board will also hold a briefing seminar on the consultation paper on 30 September 2002. The purpose of seminar is to provide an opportunity for stakeholders to learn about and workshop and distil critical issues from the options raised in the consultation paper.
To this seminar, the Board will invite representative stakeholders, groups or organisations to discuss the consultation paper. It will invite the Department of the Treasury and the ATO to participate in the meetings, to assist stakeholders to gain a better understanding of the consultation paper.
The Board may also hold a further round of consultations shortly after 31 October 2002 (the closing date for submissions) to assist it in framing its own recommendations and in synthesising the comments made on the consultation paper. Participants in these consultations will principally be drawn from those who give the Board substantive comments on the consultation paper.
The Working Group considers that it will be important to ensure that, in managing these consultations, the Board complies with its own recommendations on consultation arrangements to the extent they are relevant or implied.
The more important recommendations are those relating to:
(a) ensuring that the policy intent of each new tax measure is clearly established and articulated at the time of public announcement;
[To address this, the Board should provide clear recommendations that will assist the Government in deciding upon and articulating its policy intent following its consideration of the Board's report]
(b) publishing a consultation plan outlining the objectives of the consultations, the processes to be employed and the indicative timeframes;
[The Working Group has published the consultation plan on the Board's Website and advertised in the press]
(c) providing feedback to external participants to the extent possible. The Board could meet this by:
- including in its report to the Treasurer a section synthesising submissions received on the consultation paper;
- in making its own recommendations, discussing its attitude towards views put in submissions; and
- providing an opportunity for feedback to interested individuals and organisations following the public release of its report;
(d) establishing clear accountabilities for the consultation process.
[The Board has addressed this by establishing a Working Group to have day-to-day management of the Board's work on the review]
The Working Group has identified the following classes of stakeholders that it proposes the Board should engage as part of the consultation process:
(a) residents engaged in international business, or who would engage in international business under more favourable taxation arrangements;
(b) non-residents who invest in Australia, or who might invest under more favourable taxation arrangements;
(c) providers of capital to these two classes of companies;
(d) providers of professional services to these three groups;
(e) organisations that represent industry groups; and
(f) the administrators of the taxation system.
It will be important to ensure that representatives from each of these groups are included in the consultations.
Finally, the Working Group has proposed that the consultations should follow four broad phases designed:
(a) to increase awareness of the issues that the consultation paper seeks to raise, and also the consultation process and timetable ("the awareness phase");
(b) to draw out from stakeholders their informed views on the issues raised by the consultation paper, and to provide an opportunity for them to raise other issues ("the issue identification phase");
(c) to provide an opportunity for consensus building among stakeholders where the initial indications are that there may be differences of opinion ("the consensus building phase"); and
(d) to allow time to write up the consultations for inclusion in the Board's report to the Treasurer ("the reporting phase").
The Board's final report to the Government will contain a synthesis of the comments it receives from the public on the consultation paper (together with a copy of those comments), and its own recommendations to the Government.
As mentioned, the major focus of the Board until, at least, the end of the year will be on the Government's review of international taxation arrangements. The Board also has yet to finalise its report to the Government on discretionary trusts. The Treasurer's recent announcement on an exposure draft of the legislation regarding the definition of charity will also take some of Board's time in its wide consultation with the charitable sector. These tasks are likely to consume a large part of the Board's available resources over the next six to nine months, but there will still be some scope to take on additional work.
With the expectation that the Board's work on trusts and the review of international taxation arrangements will be completed or substantially completed by the end of 2002, and consultation on charity sometime by early 2003, there is some flexibility for the Board in setting its forward work program. This provides an opportunity for the Board to reassess the ongoing strategic focus of its work.
To date, the Board's work has predominantly centred on issues referred to it from the Government for consideration. This has largely reflected the level of demand on the Board's time from these projects.
It is important, however, including in terms of maintaining relations with its key community stakeholders, that the Board develop a forward strategic work focus.
In this context and consistent with its Charter, the Board intends to:
(i) promote processes of continuous review of the tax system, with a view to facilitating more gradual and manageable changes needed in the light of changing economic, social and other circumstances; and
(ii) continue to monitor the adequacy and effectiveness of community consultation in the course of the development and implementation of taxation laws.
From a more specific angle, with the TVM being behind us now, the Board may consider appropriate consultation processes to help implement the Ralph Review recommendations intended for introduction under a TVM framework, in particular those relating to black hole expenditure and the taxation treatment of rights, within the current legislative framework. The Government announced its intention to develop, in consultation with the business community, a systematic tax treatment of rights and blackhole expenditures, with a view to implementing these changes by July 2005.
Further, the Board could consider consultation processes in exploring the scope for making improvements to the current income tax law in a context of merging the two present Acts - the ITAA 1936 and ITAA 1997.
The Board of Taxation remains very active in pursuing its Charter to enhance community input to the processes for developing and implementing taxation legislation.
The Board will continue 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.
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.
To this end we will be continuing to meet with community stakeholder groups and otherwise to maintain and expand our links into the community.
The Board will continue to look to and to appreciate the support of the tax professionals, and of the TIA in particular, as we continue to strive for better outcomes for Australia's tax law and its system.
