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ADDRESS BY THE CHAIRMAN OF THE BOARD OF TAXATION, MR RICHARD F E (DICK) WARBURTON

2^ND ANNUAL AUSTRALIAN TAXATION SUMMIT

THE GRACE HOTEL, SYDNEY

10 FEBRUARY 2004

• Thank you for the opportunity to speak to you today. I have enjoyed the opportunity to speak to this group on a few occasions now and I welcome the chance to advise you of current activities. It has also proven to be a very good occasion for feedback to the Board from people such as you who have such wide experience of Australian Taxation.

• I always marvel about how I became so involved with tax issues in Australia and even more so when I read an excerpt from a speech made by one Robert Lowe to the House of Commons as way back as April 1870. He said,

• “The Chancellor of the Exchequer is a man whose duties make him more or less a taxing machine. He is entrusted with a certain amount of misery which it is his duty to distribute as fairly as he can.”

• If I can have the indulgence of the meeting, I would like to take this opportunity to introduce you to the new Head of the Secretariat, Mr Bruce Paine. Bruce replaces Mr Gerry Antioch. He actually started in his new role yesterday and we both thought this would be a good opportunity for him to hear the latest in taxation issues and to meet as many of you as possible.

• But on to business. I'd like to begin by outlining the role of the Board of Taxation and then say something about the progress of business tax reform and our current work program.

Role of the Board of Taxation

• The Board of Taxation is now in its fourth year of operation. Looking back, I believe we can fairly say that we have succeeded in influencing good tax policy outcomes.

• The Board has provided reports to the Government on a range of issues. These include: the review of international taxation arrangements; the taxation of trusts; the tax value method for determining taxable income; the establishment of the office of the Inspector-General of Taxation; and Government consultation with the community on the development of tax legislation.

• Each of these are important, but two bear commenting upon:-

• The TVM for determining taxable income was a major study with the potential for major change. The Board felt that whilst, intrinsically, it held the possibility for significant long term benefit, the transition costs were extremely high and clearly quantifiable, whereas the ultimate long term benefits could not be adequately assessed or assured. Thus the Board recommended cessation of that proposition.

• The recommendation for the consultation process was, I believe, one of the most important made and, I am pleased to say, was accepted almost in its entirety by the Government. The result was important because it formalised a process step of incorporating business input into what was previously, basically, a Treasury/ATO process.

• Most recently, we reported to the Government in December on its exposure draft Charities Bill 2003. The Bill, if enacted, would codify the common law definition of a charity for taxation and other Commonwealth purposes.

• Because of its emotional impact, this was possibly one of the most challenging reports we were asked to make. It certainly took proportionately longer than any of the others but, in the end, the Board felt it was able to give the Treasurer a report which was objective, equitable and fair.

• Board members are drawn from the business and wider community and three are from the public sector: the Treasury Secretary (Dr Ken Henry), the Tax Commissioner (Mr Michael Carmody), and the head of the Office of Parliamentary Counsel (which was Ms Hilary Penfold but now is Mr Peter Quiggin).

• The Board had its genesis in the Ralph Review of Business Taxation which recommended the establishment of a Board of Taxation to advise on the development and implementation of business tax legislation.

• In fact, the Government decided that the Board should have a broader mandate to advise it not just on business taxation but on the tax system as a whole.

• We are an advisory body and do not determine tax policy. The Board has vigorously guarded the fact that we are neither a lobby group for business nor a “rubber stamp” for the Government. The Board is, in fact, a bridge between business and Government, which is something the Ralph Report suggested was clearly missing in the Business/Government relationship.

• Our functions include advising the Treasurer on:

• the quality and effectiveness of tax laws and the processes for their development, including the processes of community consultation and other aspects of tax design;
• improvements to the general integrity and functioning of the tax system;
• research and other studies commissioned by the Board on topics approved or referred by the Treasurer; and
• other tax matters referred to the Board by the Treasurer.

• In essence, our task “kicks in” after the policy intent has been espoused by the Minister and one of our fundamental roles is to ensure that any resulting legislation meets that policy intent.

Community consultation

• Thus, a principal focus is on achieving effective community input into tax laws, on assessing the quality and effectiveness of those laws, and on helping the Government to determine the community's priorities and concerns about the tax system.

• The Board provided its report to the Government on Government Consultation with the Community on the Development of Taxation Legislation in March 2002. In May 2002, the Treasurer announced that the Government had decided to largely adopt the Board's recommendations on consultation.

• The Treasurer said that, during the development of future tax measures, the Government will be working from an in-principle position of:

• consulting on all substantive tax legislation initiatives, except in certain defined circumstances.
• 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 policy and legislative detail;
• thoroughly road testing draft legislation and related products prior to implementation;
• ensuring policy intent for each new measure is clearly established and described by public announcement;
• announcing for each new substantive tax measure a consultation process, with roles and responsibilities specified;
• releasing an indicative forward programme of tax legislation; and
• providing better feedback to external participants in consultation processes.

• These are very positive developments which are already leading to better policy and legislative outcomes.

• The Treasury recently released a brochure, Engaging in Consultation on Tax Design to inform potential participants how they can engage constructively in Treasury's consultation processes.

• The Board (as is required by our Charter) actively monitors this process by receiving regular reports from Treasury as to consultations adopted .

Misconceptions about the Board

• There are a couple of common misconceptions about the Board I'd like to briefly address.

• One is that it is a Government body. It is not. The Board is fully independent of Government. We are advisers to Government and I believe that Treasury Ministers value the business and broader community perspective we bring to tax policy issues. The make up of the Board enhances that.

• While the Board can and does offer views to the Government on any issue within its charter, its agenda is largely determined by the Treasurer, often within set terms of reference.

• Our advice and recommendations are then independently arrived at. But it is advice only, which the decision-makers -- the Government -- can accept or reject. Our track record of acceptance of these recommendations has been good.

• We can also provide a 'lightning rod' for government by helping to discern community concerns and priorities in relation to the tax system.

• The other misconception is that the Board is concerned only with tax policy measures affecting big business. The Board has certainly made some important contributions to the business tax debate, although our August 2000 start date meant that we missed a good deal of the action.

• But significant Board resources have also been devoted to issues not of direct concern to big business -- such as the taxation of trusts, the establishment of the Inspector-General of Taxation, and the recent charities consultation.

• In addition, the Board is undertaking a post-implementation review of the non-commercial losses measure which of course mainly affects smaller taxpayers.

• To ensure that the Board gains regular input on current issues the Board meets regularly with representatives of all levels of the business sector as well as with tax practitioner and welfare organisations. It seeks broad community input.

Business tax reform

• However, advice on business tax reform remains an important part of the Board's mandate, and I'd like to turn now to those issues.

• Australia's strong economic performance, over a sustained period now, has owed much to a comprehensive program of structural reform as well as prudent macroeconomic policies.

• The overhaul of Australia's tax system has been an important part of this reform effort. Business tax initiatives and indirect tax reforms have given Australia a modern and internationally competitive tax system.

• The modernisation of business tax arrangements has included:

  • the reduction in the company tax rate to an internationally competitive 30 per cent, accompanied by measures to broaden the business income tax base.
  • the new consolidation regime for the taxation of corporate groups which is designed to improve commercial flexibility, reduce compliance costs and enhance tax system integrity;
  • de-merger tax relief and a simplified system of dividend imputation; and
  • the reforms in international taxation arrangements which were announced by the Government in May last year and are being implemented in stages, with the first tranche of legislation currently before the Parliament.

   

• These international tax reforms were announced following a comprehensive report from the Board of Taxation. Many, if not most, of you provided input into that report.
• Around three quarters of our recommendations to Government were accepted and this was an excellent example of the Board being involved in community consultation prior to the formulation of tax policy change.
• The package of reforms will improve the competitiveness of Australian companies with offshore operations. They will:
  • reduce the costs of complying with the controlled foreign company rules;
  • reduce tax on foreign 'active' business income; and
  • effectively reduce foreign taxes by modernising Australia's tax treaties.
• The reforms will also encourage the establishment in Australia of regional headquarters for foreign groups and improve Australia's attractiveness as a continuing base for our multinational companies. In addition, they will enhance the competitiveness and reduce the compliance costs of Australian-based managed funds.
• Other business tax reforms include measures announced last year to assist venture capital. These will provide an internationally competitive framework to encourage more foreign investment and expertise in Australian business.

• The Government has also begun implementing reforms in the area of taxation of financial arrangements to assist business in dealing with financial innovation and in making more effective use of risk management tools.

• Not all of the Ralph recommendations have proceeded and not all of the Board's recommendations on business tax reform have been accepted by the Government. This is to be expected. As I said earlier, we are just one source of advice to the Government, not the decision makers.

• As I mentioned at the beginning, the Board recommended not to proceed with the tax value method which had been recommended by Ralph.

• However, the Treasurer has announced that a systematic legislative treatment for black holes and rights would be developed by July 2005, as recommended by Ralph for introduction under a TVM framework.

• The Government is currently undertaking a consultation process to consider these reforms which are aimed at aligning tax treatment with the economic characteristics of expenditures.

• The Board remains concerned to see greater efficiences in tax laws and reduced compliance costs -- outcomes that TVM would have helped serve but that would in our view have been outweighed by its costs.

• The Government also accepted the Board's recommendations concerning the taxation of discretionary trusts. These recommendations did not support a company type taxation model but proposed new provisions dealing with distributions from trusts in place of section 109UB of the ITAA 1936.

• Finally, the Government did not accept the Board's recommendations, as part of the review of international taxation arrangements, that a 20% tax credit be provided to shareholders on unfranked dividends paid out of foreign source income, or that dividend streaming of foreign source income be allowed.

  • However, the Treasurer has not ruled out future consideration of these issues.

   

• Much has been achieved in a relatively short timeframe. Indirect, personal and business tax reforms have given us a tax system that is more efficient, internationally competitive and robust.

• Despite understandable concerns about reform fatigue in the practitioner community, I believe we must continue to strive for best practice outcomes. We also need to address issues of avoidable complexity in tax laws.

Tax law integration

• In an address to the Conference of Economists Business Symposium in October last year, the Chairman of the Productivity Commission, Gary Banks, noted that the 1936 and 1997 Income Tax Assessment Acts, at nearly 7,000 pages, was now almost 60 times longer than the 120 pages we started with in 1936.

• He then observed, somewhat tongue in cheek, that: “were this rate of growth to continue unabated, ……… by the end of this century the paper version of the Tax Act would amount to 830 billion pages; it would take over 3 million years of continuous reading to assimilate and weigh the equivalent of around 20 aircraft carriers.”

• Now, whilst these figures have some sensationalism about them, Mr Banks makes the valid point that the complexity and length of tax legislation are partly defensive responses by government to avoidance, and hence form part of the strategic environment.

• (John Maynard Keynes said in the British Economist, “The avoidance of taxes is still the only pursuit which carries any reward”).

• In other words, we can be, and are, our own worst enemies but clearly we would all benefit from simpler and briefer tax laws, to the extent that can be realistically achieved.

• Indeed, we should not lose sight of some longer term trends in the supply and demand for tax professionals. We need to improve the attractiveness of tax specialisation to students and recent graduates. Reducing undue complexity and fixing the anomalous structure of two Income Tax Assessment Acts can only assist in this regard.

• Some worthwhile progress has been made. The Government's Tax Law Improvement Project was aimed at restructuring, re-numbering and rewriting the income tax laws so that they could be more easily understood.

• The 1997 Act was enacted as part of that project and the idea was that, eventually, all the material in the 1936 Act would be rewritten and re-enacted in the 1997 Act.

• This is now happening. As significant 1936 Act provisions are amended, they are brought into the 1997 in the simpler 'TLIP' style. But it is happening at a slower pace than if the Tax Law Improvement Project, which was subsumed by the Government's 1998 A New Tax System package, were still active.

• Scarce tax legislative instructing and drafting resources are fully occupied in meeting the Government's current legislative agenda and it would be unrealistic to expect that a full tax law simplification rewrite could be undertaken at this stage.

• However, the Board is scoping a possible project for integrating the 1936 and 1997 Acts, an idea first raised by the Board in its report on the tax value method. We are considering whether there may be relatively straightforward options for reducing the volume of tax legislation and making it more useable for taxpayers and their advisers.

• While the initial pay-off may be small, such a project could establish a better platform for longer term improvement as legislation is amended in the normal course. It could also help accelerate a longer term re-think of the principles behind the tax law, its structure and drafting style.

• The tax practitioner community would be the primary beneficiary of any change in this area, but may also face some adjustment costs -- for example if any restructuring of the tax Acts involved the re-numbering of provisions.

• There is a familiar trade-off here between short-term pain and longer term gain. This is sometimes difficult to sell, but I would liken it to installing a new piece of computer software. The transition can be both costly and frustrating. However, after some initial inconvenience and re-learning, we often wonder how we managed without it.

• The Board is keen to ensure that the costs and benefits of various options are fully assessed in consultation with practitioners.

• We are also consulting with the tax publishers and members of the Board's Advisory Panel of experts.

• We will then develop advice for Ministers so that they can decide whether a project should proceed.

Post-implementation reviews

• I have mentioned the Board's current post-implementation review of the non-commercial losses measure.

• This is the first of what I anticipate will be a series of Board reviews of the quality and effectiveness of tax legislation.

• The idea is to examine legislative measures which have been on the books for at least two years or so -- long enough for experience to have been gained with them -- and to ask, among other things, whether they:

• have given effect to the Government's policy intent;
• take account of taxpayer circumstances and commercial practice; and
• avoid significant unintended consequences or undue compliance costs.

Conclusion

• These are some of the issues the Board is looking at. Two eminent people made wonderful comments about tax. Albert Einstein said, “The hardest thing in the world to understand is income tax” and Edmund Burke said, “To tax and to please, no more than to love and be wise, is not given to man.”

• We would welcome any input you would like to make to our processes -- as individuals or through your various affiliations.

• The Board will continue to do all it can, within the terms of its charter, to help ensure robust community consultation leading to high quality and effective tax law.

• Thank you for the opportunity to speak to you today.