Submission No. 14 Back to full list of submissions
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24 December 1998

The Secretary
Review of Business Taxation
Department of the Treasury
Parkes Place

Dear Dr Preston

Re: National Institute of Accountants submission to the Review of Business Taxes

The National Institute of Accountants (NIA) welcomes the opportunity to further contribute to the Review of Business Taxation discussion paper, A Strong Foundation.

The NIA made a joint submission with the Law Institute of Victoria, the Australian Taxpayers’ Association and the National Tax and Accountants Association. This further submission expands on some of the general principles outlined in the joint submission.

The NIA is Australia’s third largest accounting body and has over 12,000 members, with a large proportion self-employed as tax practitioners or employed in a position involving taxation.

With our focus on small business, the NIA strongly supports the establishment of a sound foundation and a framework of coherent principles capable of adaptation to meet changing needs and policies for the Australian tax system.

The NIA strongly desires greater simplicity, better equity and a more efficient tax system. We trust that the joint submission and this submission will be given full consideration and support and we would welcome the opportunity to provide any further information or advice on the issues as required.

If you have any queries, please feel free to contact Gavan Ord on (03) 9249 5594 or

Yours sincerely

Patrick Derham FNIA



This submission has been produced as an addition to a joint submission for which the National Institute of Accountants was a co-signatory .

The principal recommendations of this additional submission are:

  1. There is a need to ensure that the principles espoused in A Strong Foundation are extended to the entire tax system to ensure greater integrity and cohesion in the design and administration of tax law between businesses and non-businesses.
  2. The Rulings system is in need of reform to ensure greater consistency and confidence in tax administration. The recommendations are:
    • The recommendations included in the ASCPA submission on the Rulings system be adopted.
    • The recommendations made in A Strong Foundation be adopted.
    • The Rulings system in its entirety be subject to regular external review based on the same principles that the design and implementation of tax policy is to follow.
  1. The joint teams of ATO, OPC and Treasury be under external supervision as per the recommendation in A Strong Foundation and the ATO change its management structure to report to a Board of Directors, of which the Commissioner is to be a member.





The National Institute of Accountants (NIA) makes these comments in addition to a joint submission the NIA co-signed with the Law Institute of Victoria, the Australian Taxpayers’ Association and the National Tax and Accountants Association.

The recommendations in this additional submission are more specific recommendations to issues that were generally addressed in the joint submission. The issues expanded upon in this submission are the extension of the principles in A Strong Foundation to all areas of taxation, the Rulings system and the establishment of a Board of Directors for the Australian Taxation Office (ATO).


The NIA supports many of the recommendations in A Strong Foundation and we will extend further support if the recommendations were to be extended to non-business taxation. Even though the terms of reference refer specifically to business taxation, the principles espoused in A Strong Foundation would successfully apply to all taxation.

The introduction of high level national objectives and design principles and formalised consultation processes advantage the entire taxation system and the recommendations to the Government should state that. To re-design the business tax system while leaving the non-business tax system, will lead to great inconsistencies in tax law. It must be remembered that non-business tax revenue is by far the biggest contributor to Commonwealth revenue and to not apply the recommendations in the discussion paper to non-business taxation will reduce the effectiveness of such recommendations.

The NIA strongly supports the recommendations espoused in A Strong Foundation be applied to the tax system generally. This will improve the integrity of the entire tax system and the integrity of A Strong Foundation recommendations.


In response to the information contained in A Strong Foundation, the NIA would like to express its appreciation to the Review of Business Taxation team for seeking feedback and comments on an area of the administration of tax law that is in need of change to build confidence in the administration of taxation.

NIA Recommendations

NIA support for the recommendations in the ASCPA paper on Rulings

The NIA fully supports the changes to the Rulings system recommended in the Australian Society of Certified Practising Accountants (ASCPA) submission to the Review of Business Taxation (see attached letter).

NIA support for the Review of Business Taxation recommendations on Rulings

The NIA also supports the recommendations made in A Strong Foundation. The NIA supports charging for selected private ruling requests as long as the charges are not extended to small business or non-high wealth individuals. The charge should be based on the complexity of the private ruling request and the amount of time required to complete the private ruling.

The other pre-requisite for support would be a Government undertaking that revenue earned from charging for rulings should be spent on training ATO staff to improve their technical knowledge. The ATO must guarantee that the expertise that exists in areas that would not charge for private rulings would not be diminished.

Regular review of the entire Rulings system be undertaken

As the issues that can be ruled upon will be expanded by tax reform, the NIA believes it is essential that the ATO regularly seek feedback on its rulings system as distinct from the feedback on particular rulings.

This will lead to taxpayers having a better appreciation of the rulings system and the ATO having a better understanding of the requirements of taxpayers. This proposed external review process (as distinct from the Rulings Panel) should be seen as an important part of quality assurance and improving community acceptance of the important role that rulings play in interpreting and administering the law. As discussed in this paper, this external review could be conducted by an ATO Board of Directors.

Principals against which the Rulings system should be reviewed

Any review of the Rulings system would be most successful if the system was reviewed against set benchmarks. As discussed in A Strong Foundation, a review of the Rulings system should focus on:

    • Did the system deliver the outcomes which were intended?
    • Were the objectives and principles applied?
    • Were the proper processes followed?
    • Did adequate and effective consultation occur?

The benchmark for the writing of all Rulings should be the national taxation objectives as suggested in A Strong Foundation. This high level guidance should not only apply to the design of legislation but also to the operation of legislation, which the Rulings are a part of.

The national objectives that all Rulings should be designed around are:

    • Optimising economic growth;
    • Ensuring equity; and
    • Facilitating simplification.

The national objectives should be the benchmark upon which all reviews of individual rulings and the Rulings system should be based.


NIA recommendations

The NIA supports the recommendations made in A Strong Foundation, being:

    • The Treasurer maintain full control of tax policy.
    • That a joint team of Treasury, ATO and the Office of Parliamentary Counsel (OPC) be responsible for developing and implementing policy (and seek external input in all possible situations at the earliest stages of development),
    • An advisory board, directly responsible to the Treasurer, review the operations of the joint teams to determine whether they are applying the high level national objectives and design principles to new taxation policy, and
    • At the Treasurer’s discretion, be sought for advice and feedback on tax policy proposals.

The NIA recommends that in conjunction with the above recommendations:

    • Overall responsibility for ATO governance be placed in the hands of a Board of Directors.

A Strong Foundation recommendation

A Strong Foundation identified the main problem with business tax is the incoherent and ad hoc nature of policy development and that implementation is often inconsistent with the initial policy objectives. A Strong Foundation recommended the establishment of an Advisory Board on Business Tax issues report directly to the Treasurer. The NIA fully supports this recommendation.

The NIA would support this Advisory Board to posses the authority to:

    • Independently assess how well the Treasury, the ATO and the OPC are jointly developing and implementing tax policy,
    • Become a "sounding board" on policy issues already developed, and
    • Conduct or supervise consultation on particular tax measures.

When the Advisory Board should exercise certain responsibilities should be at the discretion of the Treasurer although its core activity should be to independently assess the development and implementation of tax policy.

The NIA would support an Advisory Board that maintains a balanced view, therefore public sector is necessary, but that involvement should be in a minority.

Board supervising the operation of the ATO

A Strong Foundation only recommended the formation of an Advisory Board to review the formation and development of policy. This does not take account of many of the concerns that the ATO lacks accountability and lacks adequate supervision.

The question that has to be asked is "Does the current management and governance structure of the ATO, allow the ATO to meet the needs of the community and the Government in the administration and implementation of tax law?"

Currently, the Commissioner of Taxation is a statutory position, independent and not subject to ministerial direction in respect of the application of taxation legislation to taxpayers. The Commissioner is directly accountable to Parliament through the Annual Report and Parliamentary Committees and accountable to the community through the Taxpayers’ Charter. As this accountability is neither regular nor coordinated, it is difficult to see how the ATO is generally accountable for its operations.

There is no reason why a Board of Directors to which the Commissioner of Taxation reports to, would interfere in his statutory role and nor would it compromise his independence. As long as tax administration remains separate and independent of ministerial direction, the management structure established to oversee that administration is irrelevant. This independence from ministerial direction and other external influences is guaranteed by the strict privacy rules, which any Board of Directors would be subject to.

To ensure responsive administration of the tax law, the ATO needs to be able to adapt to changes in the domestic and global environment. A Board of Directors can ensure that in the current environment of very rapid change, that the ATO is pro-active and is strategically planning to meet future challenges. This accountability of the ATO can therefore only improve the administration of tax law by ensuring that the ATO account for their past, present and future actions, whereas, the current accountability is mainly skewed towards past performance.

The role of the ATO Board is up to the Government but the role of the Internal Revenue Service Oversight Board in the United States provides a good working model. The Board should oversee the ATO’s administration, management, conduct, direction and supervision of the execution and application of the laws the Commissioner has responsibility for. This power should also include the authority to recommend to Cabinet the appointment of senior managers of the ATO. Day-to-day control will still remain in the hands of the Commissioner and the role of the Commissioner will be very much the same as a Chief Executive Officer of any company.

The functions, roles, conduct and responsibility of the ATO Board should be based upon the common operational principles of any Board in the private sector. The Board should be constructive and positive in its relationship with the ATO and along with the Commissioner, be responsible to Parliament for the actions of the ATO and itself through an annual report to Parliament and regular review by Parliamentary Committees.

Composition of the Board should follow along similar lines to the composition of the Australian Prudential Regulation Authority (APRA) Board, being the Commissioner, the Second Commissioners and at least five non-government members coming from a broad range of experiences, not necessarily in the tax field. At all times, the composition should be weighted in favour of the non-government members. Membership of the Board for non-government members should be for a period of five years. The other alternative is to include the Second Commissioners as observers (there are three Second Commissioners) or not include them at all, but in all circumstances, the Commissioner should be an ex-officio member to provide balance and insight.

Proposals for two separate boards may bring the responsibilities of the boards into conflict. This is avoidable where the ATO Board has responsibility for the oversight of corporate governance and the administration of existing law, while the Advisory Board to the Treasurer would be responsible for reviewing the development of new law. The Treasurer should have the authority to resolve conflicts of responsibility.

The APRA Board (an extract of a speech by Geoff Thomson, CEO of APRA to the Monash University Law School Foundation on 27 October 1998)

"The APRA Act establishes us as an independent authority subject to the Commonwealth Authorities and Companies Act. We are not a government department or otherwise part of the Australian Public Service. We are not subject, in the normal course, to ministerial direction.

Ultimately, of course, APRA is accountable to the government of the day. To this end, there is a requirement for the Board of APRA to inform the Government of APRA’s polices. Should the Government disagree with those policies, the Treasurer may recommend that the Governor-General, acting with the advice of the Federal Executive Council, issue an order determining the policy to be adopted by APRA. In this event, the Treasurer is required to inform the Board of APRA that the Government takes full responsibility for the adoption of this policy. The Treasurer must also table the relevant documents in Parliament.

These arrangements provide for transparency and full accountability in any directions given by the Treasurer, and are similar to those which apply to the conduct of monetary policy by the Reserve Bank of Australia."

Obviously, the role of APRA Board can be transposed onto the ATO with modifications to fit the recommendations of A Strong Foundation and general community concerns.

JCPA recommendations revisited

The Joint Committee of Public Accounts (JCPA) Report 326: An Assessment of Tax provides recommendations on the establishment of an Australian Taxation Commission that deserves reconsideration. Although the recommendation made in November 1993 may not be appropriate based on the changed circumstances, the concerns expressed at 3.38 on page 37 still exist today and were re-iterated in A Strong Foundation. The report stated at 3.38:

"In the Committee’s opinion, the administration of the ATO and the taxation system generally would benefit significantly from the injection of opinions and strategies developed externally to the culture of the ATO. Moreover, the Committee recognised a need to expand the base of responsibility for the taxation system’s administration. In both the development of administrative policy and in the implementation of specific taxation projects, the Committee considered there was significant advantage in drawing on expertise existing outside the ATO’s formal administrative structures. The Committee recognised that advisory committees could provide only limited input into general administration. At the same time, the Committee believed that the complexity of future taxation administration in an international economy would necessarily require the utilisation to the fullest extent possible of all commercial, strategic and organisational skills available both with Australia and overseas."

The problems identified above by Report 326 persist now and A Strong Foundation identified the same environmental concerns. Obviously the then Government’s inaction on this recommendation in Report 326 has led to constant calls to Government for a review of the management structure of the ATO. These calls will continue as the systemic problems of tax administration and policy development outlined in A Strong Foundation and Report 326 cannot be solved unless the accountability and transparency of the ATO is improved with the introduction of a Board of Directors.

Any proposal to review the accountability of the Commissioner of Taxation and the governance of the ATO must draw on overseas experience of tax administration management and draw upon Board of Directors supervising independent Government agencies such as the Australian Prudential Regulatory Authority (APRA).

The NIA recommends that the Review of Business Taxation team and Treasury investigates the role, structure and operation of the APRA Board, as per Part 3 of the Australian Prudential Regulation Authority Act 1998, the IRS Oversight Board and the United Kingdom Board of Inland Revenue with a view to adapting this information to a Board of Directors for the ATO.


A Board of Directors would bring accountability, continuity and expertise to the management and review of the ATO operations improving the ATO’s ability to meet community and Government expectations in the administration and implementation of tax law.


What the NIA is seeking from the Review of Business Taxation is a more coherent, simplistic and efficient taxation system. The recommendations contained in this submission are a reflection of those objectives in that they will assist the design and administration of all tax law to better reflect the small business community’s expectations.



Background to the NIA position on Taxation Rulings

NIA reaction to the performance of the Rulings system in 1997/98

The NIA is generally pleased with the performance of the rulings program for the 1997/98 income year. Rulings are now prepared in a more timely manner and take better account of alternative opinions although there were a number of issues that emerged during that year that called into question the reliability of rulings as emphasised in the Bellinz Pty Ltd v FCT 98 ATC 4634.

Even though the Commissioner was quick to downplay the possible effects of this case, the NIA believes the ATO should be more active in promoting to, and behaving in a manner that inspires taxpayers to have confidence that they can rely on the interpretation in a public ruling.

The pro-active position the ATO took on self-education expenses is an example of where the NIA believes the ATO performed well in publishing a ruling (as distinct from the administration of that ruling), while the release of a draft determination rather than a draft ruling on novated leases is an example of where the NIA believes the ATO performed badly.

The Self-Education Ruling, TR 98/9 is an example where the ATO took a relatively pro-active stance in its interpretation but failed in the implementation of the new interpretation. The administrative and compliance costs incurred by tax practitioners and taxpayers’ were substantial, and the complexity of the explanation in TaxPack 98 had the effect of taxpayers that could legitimately claim the extra deduction or lodge an amendment abandoning their opportunity.

The Rulings system does not just involve the publishing of a Ruling. It also involves the implementation and administration of the interpretation adopted in the Ruling. Because of the poor implementation and the compliance problems, TR 98/9 was a poor Ruling.

The ATO should publish a ruling instead of a determination where changes in interpretation may need extensive explanation. The NIA considers that a lack of explanation in Draft Tax Determination TD 98/D6 on novated leases was this draft’s major weakness.

Even though the NIA and the other professional bodies will disagree with the ATO on the interpretation of some issues, as long as the ATO fully explains its position and identifies alternative positions (and gives the reasons for debunking that position/s) then public rulings are of a high standard and objective.

The NIA holds the opinion that any external publication of the ATO should fully explain in language that the target audience can understand the ATO’s interpretation. The NIA believes that most rulings follow this requirement.

The rulings system often does not consider the commercial reality of implementing the Commissioner’s interpretation. Initiatives like ‘Safe Harbours’ found in Sales Tax Rulings are extremely helpful to taxpayers and provide certainty as to how the Commissioner would treat differing arrangements whereas Income Tax Rulings only provide certainty where the taxpayer’s arrangement is the same as the arrangement ruled upon. The NIA would encourage the ATO to publish more rulings following the Sales Tax rulings format.

The NIA considers that the ATO rulings system did not meet the expectations of users by failing to rule on a number of issues, such as the resettlement of trusts. These issues, especially those that have a restriction on the release of advice, should be ruled upon as soon as possible. But the NIA is appreciative that the number of listed issues needing rulings has diminished.

In conclusion, the NIA believes that the rulings system performed relatively well in the 1997/98 income year, even though the rulings system does need to be reformed.



24 December 1998

The Secretary
Review of Business Taxation
Department of the Treasury
Parkes Place


Dear Dr Preston

Re: National Institute of Accountants letter of support on the ASCPA submission on the Rulings system

The National Institute of Accountants (NIA) extends its full support for the adoption of the recommendations in the submission prepared by Professor Cooper on behalf of the Australian Society of Certified Practising Accountants (ASCPA) titled Improving the Operation of the Income Tax Rulings System.

The NIA submits that the recommendations in that submission by the ASCPA be adopted in full by the Review in its final report to Government.

Yours sincerely

Patrick Derham FNIA