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

3^RD ANNUAL AUSTRALIAN TAXATION SUMMIT

THE GRACE HOTEL, SYDNEY

7 FEBRUARY 2005

• Thank you for the opportunity to speak to you today. I have had these opportunities before and I value them for two reasons. (1) to bring you up to date with the current activities of the Board and (2) to hear any views you may have to offer on this subject.
• To assist those who may not have had reason to interact with the Board, I would first like to outline the role of the Board of Taxation and then I will proceed with an update on our current work program.

ROLE OF THE BOARD OF TAXATION

• The Board of Taxation is now in its fifth year of operation. Looking back, I believe we can fairly say that we have succeeded in influencing good tax policy outcomes.
• Since its inception, 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.
• Board members are drawn from the business and wider community and three are from the public sector: the Treasury Secretary, the Tax Commissioner, and the First Parliamentary Counsel.
• 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. It was felt that there was too little or too late interaction between Business and Government which often led to less than effective 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. 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.
• There are some aspects of the Board’s modus operandi that are not widely appreciated. We are advisers to Government and I believe that Treasury Ministers value the business and broader community perspective we bring to tax policy issues.
• 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. We stringently guard our role as a bridge between the business and general community and Government. We are not a lobby group for tax reform per se but neither are we a rubber stamp for Government proposals.
• However, we can,and do, provide a ‘lightning rod’ for government by helping to discern community concerns and priorities in relation to the tax system.
• Another point is that the Board is not concerned only with tax policy measures affecting big business. The Board has certainly made some important contributions to the business tax debate.
• 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, the charities consultation, and the current post-implementation review of the small business CGT concessions.
• Board membership includes small business and welfare expertise as well as tax practitioners. In addition, the Board has established an Advisory Panel that represents many community sectors. We seek broad community input by meeting regularly with representatives of all levels of the business sector as well as with tax practitioner and welfare organisations.

Tax policy

• Usually, the Board becomes involved after a particular tax policy has been formulated. Part of our Charter is to ensure, through broad consultation, that the legislation, subsequently drafted, is efficient, clear, effective and meets the original policy intent. However, in one case, the Review of International Taxation Arrangements, the Government asked the Board to consult with the community on proposed policy. This consultation was widely regarded as enhancing opportunities for community input and strengthening policy outcomes. Most of the Board’s recommendations were supported by the Government.

UPDATE ON OUR CURRENT WORK PROGRAM

• During 2004, the Board provided advice to the Government on a number of significant projects. These were:
  • Consultation on the Definition of a Charity — report provided to the Government in December 2003 and released publicly in May 2004; and
  • Post implementation Review of the Quality and Effectiveness of the Non commercial Losses Legislation

Small Business CGT Concessions Post-implementation Review

• We have a number of specific projects that are currently underway, including the Post-implementation Review on the Small Business CGT concessions that the Board announced on 3 December 2004.
• Post-implementation reviews examine legislative measures that have been on the books for at least two years or so — long enough for experience to have been gained with them. The Reviews examine, among other things, whether the legislation:
  • gives effect to the Government’s policy intent;
  • takes account of taxpayer circumstances and commercial practice; and
  • avoids significant unintended consequences or undue compliance costs.
• It is important to note that the Board’s post-implementation reviews operate within the original policy intent of the legislation. That is, we do not consider changes to the policy of the small business CGT concessions.
• We have invited submissions from the public but are encouraging submissions to be sent through a relevant industry body for logistical reasons. The closing date for submissions is 28 February.
• We have engaged two consultants to assist us with the report. They will perform a general evaluation of the provisions and an evaluation of the compliance and administrative costs of the concessions. The public submissions will also feed into the consultants work.
• We will consider all of this information to compile a report to government on the concessions. We envisage completing our report during the third quarter of 2005.

General integrity and functioning of the tax system

• During 2004, the Board turned its attention toward the general integrity and functioning of the tax system. Our particular concern is community acceptance of the tax system. Features of a good tax system include that it has community acceptance and meets the government’s objectives.
• One issue that can undermine community acceptance, and therefore the integrity, of the tax system is complexity and compliance costs.
• Clearly we live in an increasingly complex world, and this may add to the pressures for more complex laws. However, as a community we should think about why the tax system is complex. One possible reason for why the tax system appears to be more complex than needed to simply raise the required revenue is that, in response to community pressure, governments and the Parliament have over time used the tax system to do much more than simply raise revenue.
• For example, decisions have been taken to exempt, in whole or in part, some types of income, to provide various types of benefits and assistance through the tax system, and to promote some types of activity over others.
• While these decisions can lead to a more complex tax system than otherwise would be the case, they have delivered benefits to many in the community.
• However an issue the community should also consider is the balance between those benefits and the costs that are imposed by a more complex tax system, both on people and firms receiving the benefits and the community generally who have to deal with a more complex tax system.
• One way that a complex tax system can affect the community is the costs of complying with the tax legislation.
• The Board’s post-implementation reviews include a focus on the compliance costs of legislation. Other ways we are seeking to improve community acceptance of the tax system include:
  • improving community consultation by the Treasury;
  • the Board itself undertaking an active program of community consultation; and
  • looking at ways to reduce tax law complexity.

Community consultation

• Our 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.

Treasury’s consultations

• The Board has a particular remit to monitor the Treasury’s consultation with the community on the design of specific tax measures. This remit arose from a report the Government commissioned from the Board on Government Consultation with the Community on the Development of Taxation Legislation. The Board’s perspective is informed by its own contacts with the community.
• The Board has noted a very significant improvement in Treasury’s consultation. The Treasury has released a brochure, Engaging in Consultation on Tax Design, to inform potential participants how they can engage constructively in Treasury’s consultation processes. Treasury has put in place a system for evaluating its own consultation process, through community feedback, to help ensure continuous improvement of its consultations.
• Furthermore, following the release of the final Report on Aspects of Income Tax Self Assessment (‘RoSA’), the Board will be working in conjunction with Treasury to review international consultation processes with a view to identifying any improvements to the Australian system, especially in respect of non-controversial minor policy or technical amendments, and report to government. The Board and Treasury have begun work on this project. While this may seem a small part of the war against complexity, a more efficient and streamlined process for effecting these amendments would play a large role in lessening the “clutter” in the legislation and, at the same time, reduce negative, unintended consequences which are often very difficult to avoid when new legislation is drafted.

The Board’s own consultations

• The Board also undertakes its own community consultation. To this effect, the Board has recently reviewed and re-appointed its Advisory Panel.
• The Panel draws together some of Australia’s leading taxation professionals who have agreed voluntarily to contribute their knowledge and expertise in assisting the Board with its work. Panel members are appointed on the basis of their individual capabilities and expertise, and not as representatives of particular interests.
• The Panel provides an important additional source of advice to that provided by the business, professional and other community representative organisations with which the Board has developed close working relations.
• The Board is currently looking at ways to make more use of the expertise of its Advisory Panel.

Tax law complexity

• There has been a lot of recent press attention on the complexity and size of the tax legislation. While the complexity and length of tax legislation partly reflect measures to counter avoidance or to promote equity in the tax system, clearly most of us would benefit from less complex and briefer tax laws, to the extent that can be realistically achieved.
• 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.
• The Board is considering whether there may be relatively straightforward options it could recommend to the Government for reducing the volume of tax legislation and making it more useable for taxpayers and their advisers. For example, we are currently looking at the possible removal of the inoperative provisions in the Tax Acts. We believe that could make the tax laws easier to use for tax payers, practitioners and teachers. Of course, the principal beneficiaries would be the tax practitioners, who work with the tax laws on a daily basis.
• Once again, success in this area doesn’t, by itself, create simpler tax laws but it can cause a significant reduction in the size of the current tax laws and this “uncluttering” will be a strong and welcome step in the reduction of complexity.
• 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.
• The Government is also proposing to design and draft more of its new tax law measures using an approach it calls ‘coherent principles’. This approach produces law with broader operative rules about what the law aims to achieve (i.e. greater certainty and clarity on the outcomes desired) but with less of the detailed provisions that appear in much of the existing law. Where necessary, how those broader rules apply to various situations will be explained in other places, such as the explanatory memorandum, in rulings from the Commissioner, and ultimately (as now) in decisions of the courts and tribunals.
• The approach is being used in some forthcoming measures. One of those is the next stage of the ToFA legislation (Taxation of Financial Arrangements). Treasury is the key developer of this potentially very promising design process. Before implementation, broad consultation is recognised as being extremely important and Treasury is, and will be, doing this. The Board will observe and advise on these consultations. We will be observing the extent to which views submitted on the use of coherent principles in that measure were listened to and the extent to which Treasury and the consultees worked together to deliver a final draft Bill.

CONCLUSION

• These are some of the issues the Board is looking at. There has been considerable tax reform discussion regarding the levels of taxes and thresholds. Some of this argument has a bearing on compliance and complexity and, as such, we will provide our views to Government. However, all other discussions on this topic relate to policy and this is the realm of the Government and not the Board of Taxation
• 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. I believe we must all continue to strive for best practice outcomes, including the need to address avoidable complexity in tax laws.
• We would welcome any input you would like to make to our work — as individuals or through your various affiliations. Our website is located at http://www.taxboard.gov.au
• Thank you for the opportunity to speak to you today.