The Board of Taxation – The Board of Taxation - Speech

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CPA AUSTRALIA

22 OCTOBER 2002

PRESENTATION BY MR DICK WARBURTON

CHAIRMAN OF THE BOARD OF TAXATION

Introduction

Thank you.

Good morning everybody. I would like to thank CPA Australia for inviting me to talk to you today.

I have spoken at a few CPA functions around Australia, but this is my first at this major CPA Congress in Victoria. Both I, and other members of the Board of Taxation, attempt to attend, and, if required, speak at, as many functions such as these as we can to aid the two way communication between ourselves and the practising community

Of course, the CPA Australia has actively engaged with the Board of Taxation since its inception.

In particular, CPA Australia made a strong contribution to the Board's work on the Tax Value Method, and also contributed to its projects on community consultation and the Inspector-General of Taxation.

I would like to use my time today to reflect briefly on the current state of the Government's tax reform agenda, and to discuss where I see the future for tax reform. I would also like to take this opportunity to provide an update on the Board's work on the Review of International Taxation and some other areas of specific focus.

Business Tax Reform

Turning to the state of the agenda, it is almost cliché now to observe that we have witnessed an enormous amount to tax reform over the last three years. I think it is always useful, though, to remind ourselves of the importance of the achievements to date.

In addition to implementing the GST, we have seen major reform of business taxation flowing from the recommendations of the Ralph Review, including:

the lowering of the company tax rate to 30 per cent;
changes to the capital gains tax regime;
the simplified tax system for small business;
the uniform capital allowances system;
new debt/equity measures and thin capitalisation arrangements; and
introduction of the Pay As You Go Withholding System (PAYG).

And, of course, there is still more in the immediate pipeline, most notably the company tax consolidation legislation and measures to assist venture capital. The Inspector-General of Taxation will also be an important tax institution to deal with systemic issues.

Major and intensive reform has placed an enormous strain on taxpayers, tax practitioners and tax law administrators.

Understandably, this has led to calls by some for a pause in the reform process - to allow time for all these major reforms to properly bed down before contemplating further initiatives.

While I have some sympathy with this idea, I don't believe we can afford that luxury just yet. In a competitive world, Australia has to increasingly strive for best practice in all key policy areas.

Put simply, I believe there are still too many important areas of unfinished business on tax reform to rest on our laurels - even for a short time.

Some significant components of the important companies consolidation tax regime remain to be passed by the Parliament.

The legislation establishing the Inspector-General of Taxation has recently passed the House of Representatives, and is now before the Senate.

The Board is now actively progressing the Government's review of Australia's international taxation arrangements, or RITA, following the release in August of the consultation paper prepared by Treasury.

There is also a more generic issue, shared I might add with many other developed countries, of the need to address the complexity of our tax laws and the cost of complying with it.

No doubt, many of you here could identify other issues of some priority.

I think there would be a large measure of agreement, however, that the ones I have just mentioned rank among the most important at the present time.

For the remainder of my talk, therefore, I would like to elaborate on the current status of some of the key issues as I see them.

The Consolidation Regime

Starting with the companies consolidation regime, many here may recall that, partly on the advice we were given by CPA Australia, the Board recommended to the Treasurer in February last year that he defer implementing this measure by 12 months. The Treasurer agreed.

It was, in particular, abundantly clear at the time that most businesses, especially smaller to medium sized businesses, were simply not prepared for the change.

Reflecting this involvement, the Board subsequently has been concerned to do all it possibly could to ensure that the legislation commences in an orderly fashion.

To this end, at the request of the Australian Tax Office - but also, I would have to say, in light of some unease among Board members about progress being made at the time - the Board in October last year appointed a private sector representative to the high level steering group oversighting the company consolidation project.

That person was Mr Ken Spence of the Melbourne tax advising firm, Shaddick and Spence. I am sure many here will know and recognise Ken as an expert in corporate tax matters. I believe this initiative proved to be enormously successful in assisting with the development of the draft legislative package released in February.

The feedback the Board received, both from the Government and Corporate sectors, was that Ken played an extremely valuable role in contributing his technical and commercial expertise to the shaping of this package, and in successfully alerting to the pitfalls of some key elements or approaches that otherwise might have been pursued.

The appointment of Ken in this role potentially provides a model for future exercises of this type.

The consolidation project has now reached the point where, from 1 July 2002, eligible wholly-owned groups will be able to consolidate to form a single entity for income tax purposes. The head company will pay PAYG installments and self-assess a single annual income tax liability for the whole group. There is no need for me now to elaborate on the importance of these changes for corporate groups.

Significant legislative changes have been developed to implement this reform. At this stage, it is proposed to introduce the measure in four Acts.

The first Act, which has already received Royal Assent, allowed wholly-owned groups to make a choice to consolidate, and therefore be treated as a single entity for income tax purposes. A second Bill currently before the Parliament deals largely with transitional issues. The third Bill, introduced to the Parliament just last week (on 16 October), and a planned fourth Bill, will deal largely with groups that have an international connection.

It is pleasing to see that members of CPA Australia are members of the consolidation joint design team. The joint design team plays an important role in the development of the legislation, meeting regularly with those designing the legislation to discuss particular issues.

The consultative approach to developing the legislation has been widely praised by the business and professional community.

Entity taxation

In conjunction with its recommendation to defer the consolidation legislation, the Board also recommended that the impending Entities Taxation legislation similarly be deferred and re-evaluated in light of the strong community concern at its potential impacts.

In the event, the Treasurer announced that the Government had abandoned the legislation, and that it would commence a new round of consultations on the issue of the appropriate tax treatment of trusts.

The Treasurer also announced that the Board would be involved in this further process.

In taking up the matter, the Board has gone back to a "clean sheet" of paper to identify if there are any specific tax abuses in the area of trusts. The Board has initially been assisted in this task by a Working Party comprising representatives from Treasury, the ATO and a number of external experts and advisers in the field.

The objective has been to identify issues that may require a policy response and, to the extent issues are identified, to reach a view on what the potential options might be. The Board is well down the path in the development of its thinking in these respects and in the near future the Board intends to advise the Treasurer with a view to canvassing the issues more broadly with stakeholders at that stage.

I appreciate that there is some anxiety in the community about the time the Board is taking to make its report to the Government. The issues are extremely complex and problematic. People can rest assured, however, that any recommendations the Board makes will protect legitimate small business and farming arrangements involving trusts.

Complexity of the Tax System

A further major area of unfinished business, in my view, relates to the need to redress the enormous complexity of our tax law.

There does not seem to be any serious argument, in particular, with the proposition that our tax law is currently far too complex and voluminous relative to what it is supposed to achieve.

And it is probably an understatement to say that the recent round of tax reform has done little to remedy the problem!

It should come as no surprise therefore that, since its inception, by far the major focus of the Board has been on issues that go directly to the question of achieving simpler and more efficient tax law in Australia.

Early in its life, the Board embarked on a major project of identifying best practice arrangements and processes for effective community engagement and input into the development of tax laws.

In the Board's view, such engagement and input is essential to achieving good tax law outcomes, including in terms of simplicity and laws more attuned to commercial realities and the individual circumstances taxpayers. Of course, facilitating such input is also an area central to the Board's role.

Community Consultation

Some of you will be aware that the Board completed its report to the Government on community consultation arrangements in March this year.

Given its central importance to the Board's on-going role, the Board put a great deal of time and effort into this project.

In particular, we last year commissioned KPMG Consulting to extensively canvass community views and ideas about the current community consultation processes and what might constitute best practice in the future.

Many here will have participated in that exercise, either by completing the survey developed and distributed by KPMG or otherwise through attendance at the various stakeholder meetings KPMG conducted.

In addition to the information garnered through the KPMG exercise, the Board also itself conducted investigations into the issue, including a more detailed assessment of arrangements employed in New Zealand, which are recognised as being at near the forefront of current world best practice.

The upshot was a set of recommendations intended to formalise and strengthen the quality and effectiveness of community consultation processes in tax law design and implementation.

I am very pleased to say that the Treasurer accepted the Board's recommendations virtually in their entirety. In particular, he endorsed and committed the Government to:

· Consulting on all substantive tax legislation initiatives, other than in obvious circumstances of extreme commercial, market or tax avoidance and like sensitivities.

· Seeking early external input in the identification and assessment of high level policy and implementation options.

· Seeking technical and other input from external stakeholders, including the Board, in the development of the policy and legislative detail.

· Thoroughly road testing draft legislation and related products prior to implementation.

· Ensuring the policy intent of each new measure is clearly established and described by public announcement.

· Announcing for each new measure the consultation process to be followed and the roles and responsibilities of those conducting it.

The Treasurer also endorsed the Board's recommendations to release a forward work program of tax legislation and to provide better feedback to external participants in consultation processes.

A further recommendation of the Board, albeit one from which, for obvious reasons, the government members abstained, was that responsibility for the drafting of tax legislation should be transferred from the Tax Office to the Treasury.

This change has already been implemented with the transfer of the relevant Tax Office staff to the Treasury. This will allow the Government to improve the quality of our taxation legislation, while at the same retaining valuable technical expertise previously held within the Tax Office.

All of this, clearly, represents an exceptionally good outcome. A win-win, I believe, for all concerned.

The Government should benefit enormously from the greater surety these arrangements will provide that its policy proposals can be effectively and efficiently implemented. Taxpayers and their advisers should also benefit greatly from the greater opportunity the arrangements will provide for ensuring that our tax laws are more attuned to commercial practice and realities, and to taxpayer's individual circumstances.

The transfer of the legislative function will also, I believe, assist greatly in clarifying responsibilities and accountabilities throughout the legislative development process.

I should add here that, in making this recommendation, we were not seeking to condemn or criticise the Australian Tax Office for its work in the area. Rather, the intention is to address what we saw as a fundamental structural flaw in current arrangements, one which impeded outcomes notwithstanding the best of efforts and motives of all involved.

Consistent with its Charter, the Board will continue closely to monitor and advise on the implementation and on-going operation of the new arrangements.

I would now like to turn to a topic that will be a significant component of the Board's work for the remainder of 2002. This is, of course, the Review of International Taxation Arrangements, or RITA.

Review of International Taxation Arrangements

As I mentioned in my opening comments, the Government released the consultation paper prepared by the Treasury on the RITA in late August. The Board has been asked to report to the Government by the end of December.

This is an ambitious timetable, given the magnitude of the task. However, the Board is determined to fit in with the Government's timetable for advancing this project, and is looking to schedule extra meetings to work on its report.

The Treasury consultation paper 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.

The specific objects of the RITA are 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.

These objectives fit within a more general objective of maintaining Australia's status as an attractive place for business and investment, and acknowledge the need to continually adapt the tax system to an 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 reference of such a significant project at the policy development or inception phase demonstrates the high level of confidence held by the Government in the Board.

The Board's Working Group on International Taxation

The Board has established a Working Group comprising three of its members - Messrs Tony D'Aloisio as Chair, together with Brett Heading and Chris Jordan - to oversee its work on the review and to have day-to-day carriage of the Board's work on this project.

The Board has also decided that its work on the review must achieve two objectives.

First, the report must fairly conveys the issues or ideas held by stakeholders in relation to Australia's international taxation arrangements, particularly those mentioned in the consultation paper.

Second, the report will include the Board's own recommendations in response to the issues raised by the consultation paper.

In some ways, the Board has embarked on two related projects. One project is intended to make sure that the Government is aware of the community's response to the consultation paper, a "consultation project", and another project to make the Board's own recommendations to the Government, an "advice giving project".

I would like to briefly outline the Board's consultation process on the review. In broad terms, the Board's consultations on RITA will 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 proposed consultation timetable

The consultation paper was published in August 2002, and the public submissions are due by 31 October 2002. Let me take this opportunity to encourage you to make your submissions by this time.

I have already mentioned that the Treasurer has asked the Board to report to the Government by 31 December this year, now a little over two months away. As you can appreciate, the Board is working on a very tight timetable.

Pre-closing date consultation

The Working Group met with a number of key stakeholders on 2 September 2002 to discuss and distil some 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; and

To facilitate the preparation of submissions, the Board held a consultative briefing seminar on the consultation paper on 30 September 2002 in Sydney.

The seminar provided an opportunity for stakeholders to learn about, workshop and distil critical issues from the options raised in the consultation paper. The Board wanted to ensure that all participants understand the key issues to focus on moving forward.

A wide range of stakeholders, groups and organisations from business, industry and professional bodies were represented at the seminar, including, I am especially pleased to say, CPA Australia.

The seminar included five concurrent workshop sessions where over 120 representatives participated in harnessing the range of opinions on the options in a systematic way.

I believe the workshops successfully distilled some critical issues, and the Board has been impressed by the quality of the views put forward by those representatives.

Post-closing date consultation

Shortly after 31 October 2002, the Working Group plans two separate post-closing date consultative sessions with key stakeholders in mid-November: one in Melbourne and another in Sydney.

These sessions will test the degree of consensus about particular options and their robustness.

Inspector-General of Taxation

Legislation to establish an independent statutory Office of the Inspector-General has been passed by the House of Representatives and is currently being considered by the Senate. Should the Senate pass the legislation, then I understand the Inspector-General could be in place before the end of this calendar year.

The Inspector-General will advise the Government on systemic issues in tax administration with a view to improving the administration of the tax system from the perspective of taxpayers. It provides a means of improving the way the Commissioner interacts with, and is perceived to interact with, taxpayers.

The Board of Taxation examined the Government's proposals for the establishment of the Inspector-General and reported to the Minister for Revenue and Assistant Treasurer in July this year. The Board found there was strong support for establishment of the Inspector-General, filling a gap not covered by the Commonwealth Ombudsman and the Auditor General as well as the various appeals mechanisms operated by the Commisioner of Taxation, courts and tribunals.

The Government accepted all the Board's recommendations - in-principle - and a copy of our Report is available on the Board's website.

Many of you may have seen advertisements in the weekend press seeking expressions of interest in the Inspector-General position. Anyone interested in applying to become the inaugural Inspector-General should contact Senator Coonan's Office for more information. Expressions of interest have been sought by 1 November 2002.

I know that many of us have a keen interest in who will be appointed as the inaugural Inspector-General. Appointing the right person will be critical to the success of the new office. Could I encourage you all, and CPA Australia in particular, to encourage the right people to put themselves forward for this important new role in the tax system.

Advisory Panel

Before I conclude today, I would like to say a few words about the Board's Advisory Panel appointed in early July this year. The appointment of the Panel has raised concerns that its membership is not sufficiently representative of all the participants in the tax system.

The Board's expectation of the Panel is that it will provide a standing, ready source of high level expert advice on technical issues on which the Board could quickly draw in the course of considering the taxation issues likely to come before it. Its focus is therefore on technical issues, rather than being representative of the broader community.

The Panel members have provided valuable assistance to the Board in the RITA consultation process so far, helping it to understand the issues raised by others. The Board hopes that the Panel will continue to assist the Board in understanding the issues raised by stakeholders in submissions on the consultation paper.

The Board expects that it will continue with its current practice of engaging consultants to undertake specific assessments. The assignment of such commercially remunerated work is subject to Commonwealth Government tendering guidelines.

It is possible, therefore, that members of the Advisory Panel could also be engaged as consultants to the Board, provided they qualify under those tendering guidelines. Such opportunities, however, would not be restricted to Panel members.

Concluding Remarks

I have covered a lot of territory so far this afternoon and I would conclude by thanking you for your interest in the Board's work.

It is evident that the Government continues to have a very active tax reform agenda, and that the Board of Taxation also continues to plays its part in enhancing community input in the processes for developing and implementing taxation legislation.

The Board's immediate task is to complete the consultation processes for the RITA, which I discussed in some detail.

The Board is conscious of its responsibility in the RITA consultation process to make balanced recommendations that benefit the community as a whole. For example, a change may be very desirable in increasing Australia's competitiveness, but may have an associated revenue impact. At the same time, revenue impacts are important to governments and a community seeking to maintain vital services.

There are also international trends to consider and we must be aware of global taxation developments. A balanced approach is pivotal to formulating appropriate recommendations by the Board.

The Treasurer's recent announcement on an exposure draft of the legislation regarding the definition of charity will also engage the Board's attention. I expect these consultations with the charitable sector will be undertaken in early to mid next year.

These tasks are likely to consume a large part of the Board's available resources over the next six to nine months, but there is some scope to take on additional work.

The Board will continue to play a vital role in ensuring that taxation laws are developed in a way that meets policy objectives, are more targeted and have fewer unintended consequences.

To be fully effective, the Board needs, and seeks, the ongoing involvement of the tax profession, in particular. That is to say, those of you gathered here today.

I continue to look forward to your support, both individually and through CPA Australia, as we strive to improve our taxation system.

Thank you again for your time this morning and now afternoon.