Review of Business Taxation - A Platform for Consultation
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The members of the Review of Business Taxation today released their second discussion paper, A Platform for Consultation. In releasing the paper, the chairman of the Review, Mr John Ralph AO, said:
‘This paper will provide a focus to the policy issues requiring consideration in shaping an internationally competitive and structurally sound business taxation system for Australia’.
A Platform for Consultation follows the release in November last year of the Review’s initial discussion paper, A Strong Foundation, which proposed a series of national objectives and principles to underlie the reform of business taxation, and the release in December of An International Perspective, an information paper outlining the tax systems of other countries.
Consultation is crucial
In releasing the discussion paper, Mr Ralph expressed his hope that the successful consultation that followed release of A Strong Foundation will be built on, in analysing the associated policy issues.
‘We have been heartened by the way in which the community has taken up the challenge to consider the fundamental shortcomings of current arrangements in the context of the broad national objectives and principles proposed in A Strong Foundation. The further challenge now is to look at the policy options in that same context. The views of the community will be important to the Review in shaping its final report to the Government, due by 30 June.’
The Review will be conducting public consultations on the discussion paper through a series of seminars in every State capital in March and with focus groups on particular issues. The Review will also be considering written submissions on the paper, due by 16 April. Details can be found here.
A wide range of policy options has been put forward
A Platform for Consultation lays out the issues and options for potential reforms to the taxation of business investments and entities. These areas of consideration are required by the Review’s terms of reference, and stem from the Government’s strategies announced in A New Tax System in August last year.
The length of the discussion paper serves to highlight the vast range of issues and options requiring consideration. To facilitate the reading of the document, individual chapters contain ‘site maps’ outlining the key policy issues and options covered.
The key issues raised in the paper include:
The Review has not formulated recommendations on these issues at this stage. The have considerable significance for the business and wider community, and demand close consideration. The Review will form its final recommendations on these issues after having heard the views of the community on them.
The emphasis of the Review’s final recommendations will be on practical arrangements that best suit Australia’s circumstances, including the need to enhance the international competitiveness of the economy. The national objectives and policy principles outlined in A Strong Foundation - applied within a set of practical benchmarks for investments, entities, international taxation and tax incentives - will provide an essential framework for shaping those recommendations.
A central feature of the benchmarks employed in A Platform for Consultation is the recognition that practical considerations necessitate a realistic, but structured, approach to the determination of annual tax values applying to the various classes of assets and liabilities. In particular, the Review does not attempt to apply the comprehensive income principle across the board in presenting options for the purposes of consultation, and will not be making recommendations to that effect. Nevertheless, a more consistent use of tax values will be crucial if the unacceptable complexity of Australia’s business tax law is to be remedied effectively.
Potential tax avoidance activity may need to be addressed
In the course of preparing A Platform for Consultation, various deficiencies in the current tax law giving rise to tax avoidance activities have been drawn to the attention of the Review. Mr Ralph said:
‘We have taken the view that these practices should be publicly identified as part of the Review'’ deliberations so that debate on the case for reform in certain areas is fully informed. However in doing so, we are conscious that the identification of tax avoidance opportunities could give rise to increased activity in these areas prior to reform measures coming into effect. As a result, I have written to the Treasurer (letter attached) recommending that mechanisms be put in place to stop the potential abuse - with the precise formulation of these mechanisms to be covered in the Review’s final report.’
Copies of the discussion paper are now available
Copies of A Platform for Consultation can be obtained from the Australian Government info Shops or from the Review’s web site here.
For further information, contact:
22 February 1999
The Hon Peter Costello MP
Canberra ACT 2600
POTENTIAL EXPLOITATION OPPORTUNITIES BEFORE IMPLEMENTATION OF BUSINESS TAX REFORM MEASURES
I am writing to advise you of the need to address potential abuse of the income tax system in the transitional period between the time when A Platform for Consultation is released and when the necessary reform measures might be implemented. This potential abuse could adversely impact on the business tax reform process.
In the interest of promoting open and genuine consultation, A Platform for Consultation contains a full and frank discussion about various major structural deficiencies in the current law. As an example, the paper explains the scope for capital loss creation using a chain of companies (resulting in multiplication of economic losses) and through the shifting of assets within controlled or wholly owned groups. The paper also identifies tax advantages relating to arrangements involving the assignment of leases together with associated debt. Some of these various forms of exploitation could occur in circumstances which are arguably outside current income tax anti-avoidance rules.
The options contained in A Platform for Consultation seek to remove these and other major weaknesses by way of structural repair, with possible effect from the 2000-2001 income year. In the meantime however, there is a risk that revealing the current weaknesses, in combination with foreshadowing their possible removal, may encourage their abuse before reform measures can be implemented.
Exploitation of these deficiencies presents a potentially serious revenue risk in the period prior to the introduction of the reform measures. There are also other possible reforms, including transitional arrangements for the taxation of trusts, that could give rise to strategic exploitation prior to their introduction, also with significant implications for expected post-reform revenue.
In response, we recommend that mechanisms be put in place to stop the potential abuse. Different mechanisms may be more suited to different forms of abuse. We will deal with the precise formulation of the arrangements in our final report. Alternative mechanisms are:
· Announcing remedial provisions effective from the date of release of A Platform for Consultation. One possible form of these provisions would be the likely reform measures themselves -where they are of suitable form to apply earlier than the overall reform package.
· lncorporating within the final reform measures stringent transitional rules that restrict the availability of various income tax benefits. The rules would apply to benefits that have been created after the date of release of A Platform for Consultation.
Review of Business Taxation
22 February 1999