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LAW & FINANCE AUSTRALIAN TAXATION SUMMIT
13 FEBRUARY 2003
THE BOARD OF TAXATION AND BUSINESS TAX REFORM
PRESENTATION BY MR CHRIS JORDAN
MEMBER OF THE BOARD OF TAXATION
Good morning ladies and gentlemen.
I would like to thank you for the opportunity spend some time with you discussing some aspects of business taxation. I'd like to cover the Board's activities by:
- reviewing the Board of Taxation's work over the past 12 months;
- highlighting issues currently on the Board's plate; and
- outlining the focus of the Board's activities in 2003.
I should begin by briefly outlining the role of the Board.
The role of the Board of Taxation
The Board has now been in operation for just over two years, and its operations are governed by its Charter, which is also 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 once a month.
The Board receives a modest budget of $2 million annually, and is serviced by a small Secretariat provided by the Treasury.
It is important to recognise that the Board is purely an advisory (rather than statutory) body. Its role is to advise the Treasurer and the Government on the development and implementation of tax legislation and the on-going operation of tax system.
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 absolute discretion in the day to day administration of tax laws.
Compared to other taxation institutions in Australia, the Board is the `new kid on the block'. And the new kid has been extremely active particularly over the last 12 months.
Briefly, following community consultation and its own analysis, the Board has provided advice to the Government on 4 key issues: namely,
- that development of the Tax Value Method not proceed;
- that best practice arrangements for obtaining community input to the development and implementation of tax laws be established;
- that the new office of Inspector-General of Taxation is a welcome addition to existing tax institutions; and
- that there is no compelling case to change the existing taxation treatment of trusts.
I am sure you can see from even this brief description that the Board has undertaken a very wide range of advisory tasks. I would like to say a little about each in turn and then discuss the Review of International Taxation arrangements.
The Board's consultation and evaluation of the Tax Value Method, or TVM as it came to be known, was an opportunity for the community to consider an entirely different model for computing income tax. The community consultation associated with this work was a true watershed in the development of Australian tax legislation. Because of the high and sustained level of community involvement the Board was better able to advise the Government as to its merits and drawbacks.
As you know, the announcement by the Treasurer on 28 August 2002 not to proceed with the TVM was met with widespread support from the tax and business communities.
Consistent with the Board's recommendation, the Treasurer announced, however, that while the TVM concept will not be pursued, the Government will develop, in consultation with the business community, a systematic tax treatment of rights and blackhole expenditures. The Government is working to implement these changes within the current legislative framework by July 2005.
The whole TVM consultation process is an example of the benefits that can come out of community consultation, even where a proposal is not generally supported.
Best Practice Consultation Process
From the experience we gained by working on the TVM and from talking to the business community, we realised that it would help future consultations if Australia had a best practice process for gathering community views.
So in March 2002, the Board prepared a Report on `Government Consultation with the Community on the Development of Taxation Legislation' to the Treasurer and the Minister for Revenue and Assistant Treasurer.
The Board's recommended consultation process was adopted by the Government.
Another part of that advice to Government recommended that the Treasury be given the responsibility for the design of legislation, in addition to its traditional role of providing advice on policy issues.
The Government accepted the Board's recommendations in full by adopting the Board's framework for consultations and the transfer of the design of tax legislation from the tax office to the Treasury
Similarly, the Board's consultation process on establishing the office of Inspector-General of Taxation was an opportunity for the Board and the community to have substantial input into an important new role within the taxation system.
Following a report from the Board, on 16 September 2002, the Minister for Revenue and Assistant Treasurer published the Government's response to the Board's report.
Most recommendations submitted by the Board were agreed to by the Government, and the Inspector-General of Taxation Bill 2002 was introduced into the Parliament on 18 September 2002.
That Bill is currently undergoing the rigours of Parliamentary debate and processes.
Taxation of Trusts
The Board was requested in February 2001 to consult on principles which can protect legitimate small business and farming arrangements whilst addressing any tax abuse in the trust area.
The Board's key findings were:
- That there are no compelling arguments for broad-based reform
to more closely align the tax treatment of discretionary trusts and companies and that the government should retain the current flow-through treatment of distributions of non-assessable amounts by discretionary trusts. - In light of the implementation of trust integrity measures over several years, concern about the use of trusts for tax planning does not of itself warrant fundamental change to the tax treatment of discretionary trusts.
- That the government consider options for amending the income tax law to improve the effectiveness and fairness of provisions intended to prevent individuals who are trust beneficiaries with high marginal tax rates accessing, without further tax liability, funds that have been taxed only at the company tax rate.
- That the Commissioner of Taxation clarify and publish his views about the deductibility of interest on borrowings used to finance non-assessable distributions to beneficiaries of discretionary trusts
- In a press release of 12 December 2002, the Treasurer announced that the Government will legislate to introduce new provisions to replace section 109UB that deals with trust distributions. This accords with the board's recommendation.
Also, the Government has asked the Commissioner of Taxation clarify his view on deductibility of interest in accordance with the Board's recommendation.
The Board has received very positive comment from members of the business community on the trusts report.
REVIEW OF INTERNATIONAL TAXATION
The Review of International Arrangements brings the Board into an area of policy development that is vital for Australia's engagement with the rest of the world.
In his press release of 22 August 2002, the Treasurer released the Treasury paper and asked the Board to undertake consultations and to report to the Government on the outcome of its consultations and provide its recommendations, by the end of December 2002. That deadline has been extended to allow the Board to properly consider the range of issues that have been raised. The Board's report is nearly finished.
It has been an exciting and challenging exercise for the Board for a number of reasons.
The scope of the review is quite broad and the subject matter is extremely complex. The Treasury Paper contains over 30 options covering areas including dividend imputation, the controlled foreign company and foreign investment fund rules, conduit taxation, tax treaty policy and processes and taxation of foreign expatriates.
Another distinguishing feature is the huge effort put into submissions, and generous participation in the consultation process by the business community. The Board received 58 submissions from a range of organisations and individuals, many of them hundreds of pages long. The Board has been impressed by the response to its consultation process, particularly given the very short period of time available to prepare submissions.
The Board's first step was to appoint a Working Group to take day to day carriage of the project, made up of Tony D'Aloisio as chair, Brett Heading and myself. The Working Group held a number of meetings on its own, with tax experts at the beginning of the process, and with key stakeholders after submissions closed. The full Board also scheduled additional meetings to discuss international tax issues.
Some of you here today may have participated in the Board's consultative seminar held on the 30 September 2002, attended by about 100 tax professionals and business and industry representatives. It was a very successful event and an excellent opportunity for the Working Group to pick up on the issues facing Australian businesses operating internationally.
There is a clear need to reduce complexity in the current international tax rules. This has been the constant message to come out of our consultations with the business community.
In particular, the controlled foreign company and the foreign investment fund rules are complex and impose significant compliance costs on businesses. In many instances, the costs of maintaining these rules, as they current apply, can be no longer justified. So the Board has been formulating its recommendations that it believes will substantially reduce compliance costs. Reduction in such compliance costs will help to lessen the impediments to creating and growing internationally-focused companies operating from Australia.
For Australia to remain as an attractive place for business and investment, the tax system needs to continually adapt to the increasingly integrated global business environment. This is the challenge not only in the international tax area specifically but also in areas that we might think of as purely domestic taxation.
The Board's report to the Government will be in two parts:
1. a recommendations report will contain the Board's own recommendations in response to the issues raised by the consultation paper and stakeholders; and
2. a report on the Board's consultations with the community will also summarise the public submissions made to the Board. A confidential volume of the Board's consultations with the community will contain summaries of confidential submissions. The confidential volume will be made available to the Treasurer.
As is the established practice, it is the Government call as to the time frame for considering the Board's report on international taxation as well as to decide whether and when to release the Board's report.
LOOKING AHEAD
In the next 12 months, the Board will:
- undertake public consultations on an exposure draft of legislation that sets out a legislative definition of a charity;and
- focus on reviewing the effectiveness of community consultation arrangements and the quality and effectiveness of certain pieces of legislation in delivering its policy intent.
The Treasurer announced the Board's role in obtaining community input on the definition of a charity in his press statement of 29 August 2002. When the exposure draft legislation on the definition of a charity is received from the Government, the Board will invite those in the charitable sector to provide their views. The Government has announced that it expects the new definition of charity to take effect from 1 July 2004.
The Board is also looking to prioritise the areas of tax law that it should review to ensure that the legislation is delivering the underlying policy intent. Some organisations have already come forward with their views on what should be reviewed and the Board expects to take those views into account in deciding on its work program in this area.
The Board of course remains ready to assist the Government in other matters that the Government believes the Board can add value.
Overall, it has been a challenging, sometimes difficult, but definitely rewarding year for the Board. We look forward to applying the benefit of our experiences to new tasks in the year ahead, and to further developing our excellent relationship with key stakeholders in business and the relevant government agencies. I believe that if the Board can continue to work with, and be supported by, the taxation profession and business community, we can continue to make a positive contribution to the development of taxation law in Australia.
