Submission No. 24 Back to full list of submissions
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Dwyer Partners

Terence M. Dwyer
B.A. (Hons), B.Ec. (Hons) (Sydney)
M.A., Ph. D. (Harvard)

Deborah R. Dwyer
B.A. (cum laude), M.A. (Smith)

30 December 1998


T. M. Dwyer

J.T. Larkin

We welcome the opportunity to contribute to the review of business taxation. We believe the Government has been well advised to take further advice on the form a new business taxation system should take and that the Government and the Parliament will be acting wisely in taking the time necessary to consider carefully all the possible implications of the most sweeping changes proposed to business taxation since 1915.

In this brief submission we wish to address four points: one of process and three of substance. The latter draws upon our published work, particularly for the Business Council of Australia and the Australian Tax Research Foundation.


The Role of Parliamentary scrutiny in forming tax legislation

In outlining the process of tax policy formation, the discussion paper A Strong Foundation has largely overlooked the fundamental role of Parliament. Indeed, there are times when the paper almost appears completely unconscious of the basic principles of the rule of law and separation of powers established over several hundred years of law and Parliamentary history. Contrary to the apparent assumptions of para 3.18, taxpayers are under no duty not to minimize their tax payments. Nor, as para 3.18 implies, are the Courts the servants of the Executive and its bureaucracy in pursuing some supposed "national interest" to which they must subordinate the justice of individual cases considered solely on their legal merits.

If John Hampden’s protest, the Bill of Rights of 1688 and responsible government are to have any meaning, that meaning must surely be that taxation is too important to be left to Executive Government - with Parliament treated as some sort of rubber stamp after the event. A process of Executive tax legislation by press release and policy by ambush (with consultation as an ad hoc camouflage after decisions have been made ) which began in earnest in Australia in the 1980s only engenders cynical contempt in both Parliament and the business community. It engenders adversarial relations between the public and private sectors, encourages evasion and eventually brings the law itself into contempt. (In this connexion, many taxpayers will be angered by the suggestion in para 8.11 that judgment for tax debts should be given before appeals are decided.)

In this regard we endorse the comments made by Mr. George Brownbill of ACIL at the Review’s public consultation in Canberra when he pointed out that the word "prerogative" in relation to taxation has not been associated with the Executive Government since the fall of the Stuart monarchy. Taxation is ultimately not the prerogative of the Treasurer, nor the Treasury, nor of the Australian Taxation Office nor anyone but of a representative Parliament. Paragraph 7.12 of the discussion paper falls into fundamental error in suggesting the contrary.

Blood has been shed in civil war for the principle that taxes can only be collected by law sanctioned by a representative Parliament; this principle has caused kings to lose their crowns and, in disobeying it, Great Britain lost her first overseas empire. For this principle, Pitt the Elder declared that he rejoiced that America had revolted. Ministers of the Crown and their officials may propose but it the duty of Parliament - and Parliament alone - to dispose of taxation legislation.

The central weakness of the tax policy process in Australia in the present day is that Parliament is not adequately equipped to discharge its prime responsibility for taxation legislation.

Until both the House of Representatives and the Senate have standing committees on taxation which are adequately resourced with independent budgets for independent counsel and expert advice and which are in a position to examine, line by line and clause by clause, every tax bill presented to both those of legislative chambers, the process of parliamentary consideration of tax legislation must necessarily be inadequate. As the discussion paper recognizes at para 7.8 in the United States the House Ways and Means Committee and the Senate Finance Committee of the Congress ensure strong oversight of the tax legislation process.

Public service officials cannot be expected to perform the inconsistent roles of policy proposers and advocates to Ministers and of advising Parliament impartially on the meaning and effect of tax legislation. Parliament (and indeed Ministers) would profit from a process which institutionalized the hearing of different points of view. A committee process being inherently less adversarial or high profile than the full chamber would also enable governments to reconsider measures without the embarrassment which might attend public reversal in the full chamber. Such Committees would be fora in which different advice from different Departments could be tested together with input from business and the general community. The potential tax problems for Australian business (eg for fiduciary funds management) which are now emerging from the current proposals are proof that tax proposals cannot sensibly be developed without the fullest range of input, advice and public scrutiny.

We therefore suggest that the most urgent institutional reform required for an effective tax policy process is that permanent, fully-resourced, taxation committees be formed by both Houses of Parliament


The "Entity" taxation regime

We note that the entity tax regime proposed is based on treating limited liability business vehicles as companies for tax purposes. However this is inconsistent with the discussion paper’s basic acceptance of a single layer of taxation together with the principle that business vehicles should be treated as extensions of their owners. In our previous work for the Business Council of Australia we advanced the proposition that the model for taxation of business vehicles should be partnership tax treatment. The only consistent way to treat business vehicles as extensions of their owners is to adopt the treatment used for sole traders and partnerships which reflects a "conduit" or "see through" approach. Trusts should not be taxed as companies: rather both should be able to be taxed like partnerships or sole traders.

As we pointed out in our articles published in 1994 and 1995 by the Business Council of Australia in its Bulletin and in our later study for the Australian Tax Research Foundation the "conduit" or "see through" approach avoids numerous inequities and inefficiencies, such as the denial of losses and the double taxation of distributed foreign income. We also note that limited liability has nothing to do per se with company taxation and that the so-called "entity" tax regime appears to proceed upon an unacknowledged and half understood adaption of United States tax jurisprudence in this regard. (As we noted at pages 30-31 of our Tax Research Foundation study, US public finance experts acknowledge that limited liability does not justify a corporate tax.) In particular, one may ask whether limited partnerships, Wyoming limited life companies or Subchapter S corporations will be taxed as partnerships in Australia as they are in the USA.

By contrast, the proposal to adopt an entity system with a deferred company tax regime would make Australia uncompetitive internationally as a location for any multinational business - whether foreign or Australian owned. By contrast, it is worth noting that Singapore has eliminated the toll charge which it used to levy on income flowing through Singapore companies: Singapore recognized the impediment such a dividend toll charge placed in the way of Singapore becoming a regional financial and headquarters centre.

In this regard we were somewhat alarmed by the casual acceptance by the Review at the public consultation in Canberra that Australian multinational business would eventually have to leave Australia anyway. We do not take such a pessimistic view. We believe that a "conduit" or "see through" approach to business vehicles would enable Australia to remain a headquarters for international business even with its limited population. We note that both Switzerland and the Netherlands with their small populations continue to host large multinational companies.

One thing, however, is as much a certainty as any economic proposition can be: the adoption of the entity system as proposed would lead inevitably to Australia becoming a branch office economy with the loss of jobs and investment opportunities that would bring about.


Income concept

The discussion paper adopts (virtually without argument) a new concept of income as including all gain, notwithstanding the bulk of 200 years of legislation and case law. The adoption of this Schanz-Haig-Simons comprehensive "income" tax base is a radical departure from both previous income concepts and national accounting practice. For example, at paras 3.20, 6.48 and 6.50 it is not recognized that the traditional British tax law concept of income is not the so-called "comprehensive income" concept and that the traditional concept is closer to the national accounting concept of income employed by the Commonwealth Statistician. That concept aims to measure the annual net output of the land, labour and capital of the nation.

We think there are sound reasons not to extend the income concept to capital gains or changes in asset values or liability positions.

For a start, capital gains represent after-tax gains in most cases and their taxation involves double taxation as well as the notorious "lock in" effect. Even the United States, which has gone furthest in this direction, has been compelled by economic reality to create numerous legislated and case law exceptions to so-called comprehensive income taxation. In particular, capital gains are taxed at a lower rate.

We also note that capital gains taxes on shares can never be applied to non-residents and this furnishes a reason for Australian business to issue equity offshore as well as for Australian residents to invest offshore themselves. It is instructive that many of of our regional competitors do not have capital gains taxes.

We question the merit of adopting as a benchmark or goal an extended "income" concept which is open to theoretical objection, which is unattainable in practice and which has never been adopted by any country.

We note that this extended income concept becomes particularly open to question when it is so frequently asserted in the discussion paper that determining taxable income should involve ignoring the legal form of transactions. How can one have a system of tax law divorced from normal legal concepts? Unless one is prepared to dispense entirely with the rule of law such a thing is a metaphysical impossibility.

Schedular versus global: tax competition

We note that the discussion paper talks of improving the competitive position of Australia as far as tax is concerned but fails to understand the dynamics of international tax competition. In particular, it has (as Mr Howard Pender pointed out at the Canberra consultation) ignored the merits of schedular taxation designed to reflect the different mobility of tax bases.

It is stated at para 2.36 that international tax competition is potentially harmful in the same manner as tariff competition of an earlier era. The analogy is quite misplaced..

Whereas tariff competition involved putting up taxes and destroying trade, tax competition involves driving down tax rates on mobile factors of production towards their optimal level.

The assertion is essentially that tax competition between nations can lead to beggar-thy-neighbour policies and less than optimal public expenditure, leaving everyone worse off. But conclusions in economic theory depend on assumptions. Such a view is correct only if there are no immobile tax bases. Where there are mobile tax bases (eg capital) and immobile tax bases (eg land), tax competition can result in a shift of tax base from mobile capital to immobile land. Such a shift is, in fact, a shift to a more efficient tax base, one conforming to the general Ramsey efficiency rule of taxing more those things which are less elastic in supply. Tax competition may thus be efficiency enhancing and no bad thing.

This observation highlights the intrinsic unsoundness of the "income" concept adopted in A Strong Foundation. It is a weak foundation for taxation policy to adopt an income concept which includes highly mobile elements such as capital gains. Rather than trying vainly to tax all gains alike, policy would be more sensibly adapted towards taxing that which it can (immobile factors such as land) and untaxing what it cannot (financial capital).

The same observation also highlights the fallacy of the assertion made in para 5.13 that an entity tax regime is necessary to ensure a return to Australia from profitable inbound investment. Ultimately, capital as such can only earn a world-determined rate of return: excess "profits" are capitalized as land rents. A tax on capital income (such as an entity tax) simply drives up the cost of capital to the Australian economy whereas land or resource rent taxes can charge directly for any benefits accruing to investors from use of Australian resources.



We believe the problems (eg on trusts) now emerging in relation to business tax changes vindicate the Government’s decision to reconsider these matters in some detail. Quite simply, Australia cannot afford to get it wrong. The recent financial turmoil is almost certain to lead to greater tax competition in the Asia-Pacific region rather than less. Australia cannot afford to see investment and jobs driven offshore by an uncompetitive business tax system.




T.M. Dwyer

J.T. Larkin



T M Dwyer and Deborah Dwyer, Review of ACT Partnership Law Consultative Document (ACT Attorney-General's Department, Canberra, 3 October 1991)

T M Dwyer and Deborah Dwyer (with Jeff Mann), "Limited partnerships: Does tax equity no longer matter?" Editorial Butterworths Weekly Tax Bulletin (25 August 1992)

T M Dwyer and Deborah Dwyer, "Limited partnerships: the Treasury versus the level playing field" Australian Venture Capital Journal (October 1992)

T M Dwyer (with J T Larkin), "Company Tax and Imputation: Why not Learn from History?" Business Council Bulletin (May 1994)

T M Dwyer (with JT Larkin), The Taxation of Company and Business Income Australian Tax Research Foundation Study No 25, Sydney, 1995

T M Dwyer (with J T Larkin), "Company taxation - getting it right" Business Council Bulletin, No 125, December 1995