That a more systemic and integrated taxation design process be formalised between the Treasury, the Australian Taxation Office and the Office of the Parliamentary Counsel -- the three Commonwealth agencies with responsibilities relating to the design and administration of taxation law.
A Strong Foundation put forward for discussion a number of concerns about the way changes to tax laws affecting the business sector are currently identified, designed and administered. Possible reforms in these areas were canvassed. The response from the business sector was spirited, with debate hinging not on whether such reforms were needed but rather on how far they should go.
The following recommendations respond to identified concerns and set out a new, improved architecture for the continuing reform and maintenance of business taxation in Australia.
Proposed as the fundamental change is a move from a largely sequential taxation design process to one which is holistic and fully integrated. The new process should help to produce a tax system that:
simplifies existing law within a principle-based framework;
fosters constructive participation by taxpayers, and their effective interaction with tax authorities;
promotes simpler and less costly compliance; and
is efficient and cost-effective to administer.
The starting point for an integrated approach must be the establishment of agreed national taxation objectives and, deriving from these objectives, a principle-based approach to the design of business tax policy, legislation and administration.
This concept of integration embraces not only the design process itself but also, and at least as importantly, the way the various tax-related government agencies relate with each other and with the business sector and wider community. There must be a shared sense of ownership of the issues, clear accountabilities, open communication, a commitment to consultation and cooperation and an ability on all sides to think systemically and work across organisational boundaries. The maintenance of these consultative and cooperative relationships will be a major factor in ensuring the improved design processes are able to be sustained (Figure 1.1).
Figure 1.1 The environment for reform
It is essential that policy, legislative and administrative expertise be brought together throughout the design process, to ensure that:
administrative implications are at the fore when policies are formulated and consequential legislative provisions are drafted;
reciprocally, the policy intent is reflected accurately when elaborated in legislation and the systems for its administration (recognising that legislation is the practical expression of policy); and
more generally, `feedback loops' are strengthened between policy formulation, legislative drafting and administration (including systems design).
Under proposed arrangements, not only will public sector agencies involved in the tax system work cooperatively together in integrated teams throughout the design process but those outside public sector will have an active ongoing involvement in an advisory and consultative role. The integrated teams will draw on expertise external to the public sector to ensure the best possible outcome, targeted to the objectives of government and cognisant of the concerns and realities of the marketplace.
This process, along with relevant accountabilities, national objectives and associated design principles, will be set out in a Charter of Business Taxation. A Board of Taxation, with majority membership drawn from the private sector, will be established and have responsibility for maintaining the Charter, monitoring the implementation of the integrated taxation design process and advising the Treasurer generally on systemic matters pertaining to business taxation.
This new design architecture provides the structure for the participative development of a forward work program for changes to the business tax system and the establishment of an Integrated Tax Code to consolidate all existing tax law.
Figure 1.2 The integrated approach
The new architecture (Figure 1.2) will also give structure to the process of reforming the administrative interface between business taxpayers and the tax authorities, a reform which will be pivotal to the achievement of lasting reductions in compliance costs, and lasting reductions in the numbers of, and time taken to resolve, disputes over interpretation of the law.
The business taxation system, like all taxation systems, will be continually evolving. It is essential that the process of evolution be managed properly, and therefore that the integrated design process be monitored and kept under review. As lessons are learned and shared, the design process will be refined and so that in a consultative and ordered way, the tax system will develop and evolve.
That as part of the integrated taxation design process, key elements of agency coordination include the establishment of:
(i) a standing Inter-Agency Design Committee (IADC), with each of the three agencies represented at a senior level;
(ii) cross-functional teams accountable to the IADC, each team having responsibility for taking a specific policy issue through all the stages of the policy development, legislation and administrative design processes; and
(iii) clear accountabilities for standards, product and integration at each stage of the design process along the lines proposed in the Charter of Business Taxation (Schedule 2).
In A Strong Foundation (Chapter 4), the Review found current processes to be deficient for four major reasons:
there is no sound conceptual underpinning for the legislative expression of policy;
there is no integrated approach to policy change;
there are no specific accountabilities directed at overall performance of the business tax system; and
there are no adequate arrangements for private sector consultation.
The Review stated in A Strong Foundation its view that a key element in the reform of business tax processes must be the establishment of an integrated approach to tax design. This integrated process has, at its core, defined national taxation objectives and taxation design principles. These objectives and principles are to be enshrined in the Charter of Business Taxation.
The Review recognised that integration could be achieved, but not guaranteed, by concentrating all the responsibilities for tax design and administration within one agency. But the core processes (A Strong Foundation, Figure 4.1, page 41) are so extensive, differentiated and distributed that they will always pose a demanding challenge for coordination whether or not assigned to a single agency. The Review prefers therefore to build on existing agency roles and accountabilities, allowing each agency to bring to bear its unique functional perspective and thus to optimise its overall contribution, to achieve a quality process and a quality product.
Figure 1.3 Accountabilities for business tax design
Under this integrated arrangement (Figure 1.3), specialist staff from the Treasury, the Australian Taxation Office (ATO) and the Office of the Parliamentary Counsel (OPC) will work together in cross-functional integrated teams throughout the tax design process as they have throughout the Review's own processes. While the members of the teams would retain their accountability to their respective agencies, particularly in relation to standards, there would be a shared sense of purpose, and shared ownership in the development of an agreed joint product. In addition, expertise from outside these agencies will, where appropriate, and wherever possible, be brought in to work as part of the integrated teams.
In successfully trialing integrated arrangements throughout its operation, the Review has been convinced of the crucial role that integration must play in reforming the policy process. While the details of the administrative arrangements to give effect to the integrated design process should be worked out between the relevant agencies, it is clear there needs to be a standing committee, at a senior level, to manage and be accountable for the process. That body, for convenience, has been given the name Inter-Agency Design Committee (IADC).
Members will bring to the IADC substantial expertise relevant to the business tax system, and have an understanding of all business tax policy changes and consultative processes taking place at any one time. Consequently, the IADC will be in a good position to ensure that interactions between those changes and the rest of the taxation system are taken fully into account.
The IADC will have responsibility for ensuring the participative forward work program for business tax policy (see Recommendation 1.8) is put into effect and that the objectives and principles set out in the Charter of Business Taxation are fully applied. To this end it will:
establish cross-functional project teams to address specific tax policy issues;
arrange for the teams to be resourced;
approve the teams' project briefs;
provide guidance to the teams;
ensure effective project management arrangements are in place; and
be ultimately responsible for the quality of the work produced by the teams.
The project teams will operate on an integrated basis, with membership drawn from the Treasury, the ATO and the OPC. Where appropriate and wherever possible, the teams will contain representatives external to the public sector and may also include representatives from other parts of the public sector.
Project teams will be accountable through the team leader to the IADC. They would seek to ensure that the final product meets the policy intent and is consistent with the stipulated design principles. Where trade-offs between competing agency or systems interests are required, teams will be responsible for identifying and resolving them -- including through successive escalation, as required, to the IADC, agency heads or the Treasurer.
Each agency will continue to be accountable for ensuring standards are maintained in its particular area of responsibility. The new arrangements are not intended to detract from these accountabilities, rather to reinforce them.
The Treasury is accountable for policy development and, except in cases of purely technical amendments to the law, general oversight to ensure delivery of an outcome that reflects the defined policy intention and is consistent with the national taxation objectives and taxation design principles.
The ATO is accountable for detailed design and development of the legislative, administrative and compliance systems to give effect to the policy.
The OPC is accountable for the design and drafting of the law.
The establishment of integrated teams and the IADC will facilitate a much greater degree of accountability for the overall design process. Specific accountabilities for agency standards, for cross-functional team product and for integrated outcomes are specified in Schedule 2 to the Charter of Business Taxation. The fact that all team members participate in all phases of the process and share mutual accountability for the ultimate effectiveness of the measure will encourage a truly integrated approach.
Changes to the structural arrangements of the three agencies will not guarantee improved integration and will not necessarily solve the problems of separation and lack of alignment between policy, legislation and administrative systems. The success of this proposal for an integrated design process will depend not only on the adoption of new integrated cross-functional working arrangements and inter-agency goodwill and collaboration but, associated with these, changes in organisational culture. Without such cultural change, any new integrated design process will be merely an administrative shell.
For this reason, attention will need to be paid to encouraging team members:
to think systemically about the taxation system within Australia and internationally and about the wider business, social and physical environment to which it relates;
to collaborate openly and effectively in a team environment with others who hold competing points of view, to learn from others, and to resolve differences constructively; and
to implement the integrated design process in a flexible and collaborative manner depending on the particular project's complexity, size and timeframe.
Having a robust, well structured and effectively operating tax system for Australia requires this integrated, cooperative approach. It will need strong leadership. The alternative is to see the system fall back into disrepair over time, with the community becoming increasingly frustrated with the system as a result.
That a Charter of Business Taxation be adopted in order to establish an accepted framework within which Australian taxation laws affecting business can be consistently developed and maintained.
As noted in A Strong Foundation (page xii), there is widespread dissatisfaction and frustration with the operation of the current business tax system. These feelings are shared not only by taxpayers and private sector tax professionals but by virtually all other parties involved, including the bureaucracy, the government and the Parliament.
The Review is of the opinion that an overriding reason for this situation is the complexity and ad hoc nature of the current system.
To address these systemic deficiencies, the Review recommends the adoption of an enduring and far more transparent framework for business taxation in Australia. This new framework should be expressly articulated, conceptually sound and based on agreed national objectives and framework design principles. The setting out of these objectives and design principles in a Charter of Business Taxation gives them lasting visibility, focus and status, and assists in making accountable those responsible for their implementation.
The proposed Charter, which would have effect from a date specified by the Treasurer, follows this discussion. It builds upon the framework for business taxation set out in A Strong Foundation, a framework refined in the light of submissions and consultation with the business sector.
The Charter lies at the heart of the interlocking reforms to policy, legislative and administrative processes recommended by the Review. It establishes a context within which Australian taxation laws affecting business can be consistently developed and readily maintained. The Charter serves as a benchmark against which proposed changes to taxation law, and the actions of government bodies responsible for the policy and administrative processes associated with their development and implementation, can be judged more transparently.
The Charter has at its core three national taxation objectives:
optimising economic growth;
promoting equity; and
promoting simplification and certainty.
These national taxation objectives require, among other things, that the business taxation system encourage long-term economic development, treat all taxpayers fairly and be as simple, certain, and easy to comply with as possible.
The Charter sets out a regime of taxation design principles to promote achievement of these objectives and to provide a broad, robust framework for the development of business taxation policy and legislation. These principles are of three kinds: policy design, legislative design and administrative design.
The Charter provides for an integrated approach to the design of the business taxation system, and sets out the accountabilities of those responsible for it. Consistent with Recommendations 1.1 and 1.2, it specifically requires the Treasury, the ATO and the OPC to work together in integrated teams, with a shared purpose and shared ownership of outcomes. Where appropriate and wherever possible, these integrated teams would contain representatives external to the public service and may also include representatives from other parts of the public sector.
The Charter also provides for the proposed Board of Taxation (see Recommendation 1.4) to play a pivotal role:
in fostering compliance with the defined national taxation objectives and taxation design principles; and
in ensuring there is wide consultation with affected parties at the earliest possible stage of policy development.
The Board, for its part, would act as guardian of the Charter and advise the Treasurer on its operation and effectiveness. It also would recommend to the Treasurer any changes to the Charter it believes necessary in order to ensure the Charter remains apposite.
A Board of Taxation
That a Board of Taxation be established, with the role and functions set out in the exposure draft bill and explanatory notes accompanying this report.
In an A Strong Foundation (page 96), the Review identified key shortcomings in existing processes for developing tax policy, drafting tax legislation and administering tax law. Concerns in regard to these matters have since been echoed in submissions and at consultative forums.
One particular concern has been the largely piecemeal approach which has evolved in relation to the development of business tax policy and, associated with this, the lack of adequate overall accountability for the result. The dissatisfaction and frustration of business taxpayers in this regard have been heightened by the ineffective and inadequate consultation which has taken place when changes to business tax have been under development.
In these circumstances, it is not surprising that the suggestion in A Strong Foundation (page 108) that there be created an advisory taxation board, with a majority of members from the private sector, has been received positively by the business sector. Accordingly, the Review now recommends such a Board of Taxation be established. The Board will:
draw on the knowledge and expertise of the business sector, including from professionals and advisers, and provide government with a source of independent and timely advice on the development and implementation of sound business taxation policies;
be the guardian of the proposed Charter of Business Taxation containing the national taxation objectives and taxation design principles, and recommend changes necessary to ensure the Charter remains contemporary;
be a source of informed advice on appropriate consultative processes in relation to ongoing business taxation issues;
monitor and report on the performance of the business taxation system -- and, in this regard, of the Treasury, the ATO and the OPC -- against the objectives and principles set out in the Charter; and
conduct an annual review of the application of the policy framework and processes relating to the general and specific anti-avoidance rules, to be published as part of the Board's annual report (see Recommendation 6.2).
At present there is little opportunity for the private sector to engage in formal consultations with government agencies responsible for the development of business taxation policy and legislation. This is a primary source of frustration. The establishment of the Board will be a major step forward. It will reinforce the consultation with the private sector that is a necessary part of the integrated design process. This will give the private sector greatly enhanced opportunity to consult with these agencies -- and thereby have earlier, more effective input into the policy development process. The government and its agencies will also benefit, as has been demonstrated very clearly during the current review.
For all these reasons the Board will play an important role in achieving a more open, consultative, accountable and systematic approach to business taxation and in maintaining integrity in the business taxation design process. In this way the Board will ensure that the improved methods of developing business taxation policy and legislation established and recommended by the Review continue to be a feature of the operations of relevant government agencies.
The Review received submissions seeking the establishment of a board of directors to oversee the administration of the ATO. Such a board could not, however, function effectively as an advisory body to government on the operation and development of tax policy processes. That is because the key role in this area lies not with the ATO but with Treasury; the role of the Commissioner of Taxation is mainly to administer the taxation laws. Any advisory role for an ATO board of directors would therefore largely be limited to advice on administration and the implementation of policy decisions which have already been made.
The Review does not believe the establishment of a policy-constrained board of directors would be helpful to either government or the business community. The concept of a Board responsible for administration of the ATO, which was suggested in several submissions, is not favoured. It would also diminish the statutory accountability of the Commissioner of Taxation. Rather, the Review sees a need to have an independent and business-focused advisory Board of Taxation to assist up front in the development of clear and improved business taxation policy processes and in monitoring the performance of the administrative functions against the Charter. Such an approach offers the prospect of greater certainty and less conflict in the downstream administration of business tax laws and therefore of minimising the problems which have given rise to the requests for external control over the administration of the ATO.
That the Board of Taxation comprise:
(i) seven members external to the public service, serving in a personal capacity and chosen on the basis of their expertise and experience, one of whom shall be appointed to chair the Board;
(ii) the Secretary to the Treasury;
(iii) the Commissioner of Taxation; and
(iv) one senior representative of another government agency.
Under the recommended structure, members of the Board will be senior members of the Australian community and the chief executives of the government agencies with primary responsibility in taxation matters. The majority of members will be external -- chosen by the Treasurer on the basis of their expertise and experience. These members would be appointed in a personal rather than a representative capacity, as independent members, not subject to direction from any others.
The external members should come from a range of backgrounds and collectively will bring to the Board:
a broad community perspective and commitment to the national interest;
expertise and experience in the world of business and commerce; and
a strong capacity for assessing tax policy, law and administration as well as their associated processes.
The interaction on the Board of external and public sector members will be beneficial to all parties: the ATO and the Treasury will gain a better understanding of the way business operates in Australia and internationally and of business concerns and issues, whilst the private sector members will gain a better appreciation of the administrative and policy dimensions of the tax system.
By working together in an atmosphere of goodwill, trust and shared professional commitment, the members will assist greatly in relieving tensions and building good working relationships between business and tax administration and also in reducing the costs of both taxation compliance and taxation administration.
That the Board of Taxation:
(i) present annually to the Treasurer for approval a proposed Board work program of studies and research; and
(ii) be able also to seek from the Treasurer specific references to undertake studies or research.
In addition to contributing to the development within the Treasury portfolio of the proposed forward work program for business tax policy (Recommendation 1.8), the Board will have the capacity to undertake its own program of studies and research. In this regard it is essential that it focus its energies on work that addresses the concerns and priorities of government -- particularly as reflected in the Charter. The Board will be in a position to advise the Treasurer on matters it believes should be addressed, having regard to the concerns of business, but the decision on these matters is properly one for government.
It is sensible therefore to provide for the Board to recommend an annual work program for itself and, where appropriate, to request of the Treasurer specific references, and for the Treasurer to make the final determination on these matters.
That the Board of Taxation be:
(i) provided with an independent secretariat to give it technical and administrative support;
(ii) given the capacity to commission private sector research; and
(iii) fully funded by the Australian government.
The Board must have the capability to undertake and/or commission research on the economic and technical development of Australia's business taxation system in accordance with its approved work program or with a specific reference from the Treasurer.
In its primary role of monitoring the performance of business tax processes, the Board also needs to be seen to be independent of the Treasury and the ATO, with its own direct access to the Treasurer.
For these reasons the Board needs to be supported -- at both a professional and an administrative level -- by an adequately-resourced independent secretariat. Preliminary costings suggest that annual government funding in the order of $4-5 million would be required for this purpose. This level of funding would:
provide remuneration on a part-time basis for the Board's external members;
support a professional secretariat of around 10 people;
cover the Board's administrative costs, including those of separate accommodation and travel; and
provide for the engagement of consultants and the commissioning of research.
That business taxation policy be developed in accordance with a forward work program formulated within the Treasury portfolio in consultation with the Board of Taxation and the business community, and endorsed by the Treasurer.
At present much of the ongoing tax policy process is conducted within the budget context. This circumstance leads to a veil of secrecy and the production of highly articulated tax policy changes in short timeframes that are often driven by the immediate bottom line of the budget. There needs to be a more open and integrated approach to the initiation of policy proposals relating to business taxation.
The development of a defined forward work program for business taxation policy, with appropriate consultation, approved by the Treasurer, is a sensible way to address these difficulties. It will ensure there is a visible, and public, agenda for business taxation policy.
Initially, a draft forward work program for business tax policy will be prepared by the Treasury, in conjunction with the ATO, for preliminary endorsement by the Treasurer. Program items will be supported by a project brief setting out policy objectives, resource requirements, timeframe and revenue implications. Project briefs will also include a risk assessment, addressing firstly the risks should the work not be undertaken and secondly those of not achieving satisfactory outcomes.
The Board of Taxation, with a majority of members drawn from outside the public sector, will provide assistance to the Treasury portfolio and advice to the Treasurer on the development of the forward work program and on the need for further consultation in respect of new policies for business taxation (see Recommendations 1.4 and 1.5). The Board will also be able to offer advice on the relative priorities given to various proposals in the work program and suggest areas of policy that have not been raised that need to be addressed.
Where a structural flaw in the law that gives rise to the application of the general anti-avoidance rule requires attention (see Recommendation 6.2) that work will be included in the forward work program for attention. The forward work program will be ongoing, with sufficient flexibility to meet urgent needs in this area.
Following initial consultation with the Board and others in the business community and elsewhere, as appropriate, the forward work program will be submitted by Treasury to the Treasurer for final approval.
The consultative processes provided for here should do much to dispel unnecessary and counter-productive secrecy while affording essential scope to the government of the day in handling sensitive tax policy issues. Of course, the flexibility for budget priorities to trigger the development of tax changes outside that process necessarily also would remain.
An additional attraction of this proposal is that it requires inevitable trade-offs between competing priorities and objectives to be made more explicit, thereby adding greater accountability and transparency to the policy development process. It should also increase the likelihood that changes to business taxation will be properly conceived, designed and implemented and not ad hoc as sometimes has been the case in the past.
Funding will need to be provided to the Treasury to cover the cost of developing the forward work program.
There is no doubt, in the minds of the members of the Review, that bringing together the users of the system with the designers and the administrators of the system leads to better outcomes. This has been demonstrated during the period of the Review and is a conclusion endorsed by those who have been involved with it both within and outside the public sector.
In sum, this proposal for a forward work program provides an opportunity for the private sector to add valuable input to the policy development process. Opening up the policy process to public input at an early stage provides an opportunity to build confidence and trust between taxpayers and the revenue authorities.