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Submission No. 27 Back to full list of submissions
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14 December 1998

The Secretary
Review of Business Taxation
Department of The Treasury
Parkes Place
CANBERRA ACT 2600

www.rbt.treasury.gov.au

Dear Sir/Madam,

OVERVIEW

Please find attached a submission from BDO Nelson Parkhill relating to various proposals contained in the Review of Business Taxation discussion paper "A Strong Foundation".

As a firm of Accountants and consultants our submissions focus on the difficulties our clients might experience from introducing these measures, rather than on such things as net economic impact.

For ease of comparison we have organised our submission to follow the paragraph numbers of the discussion paper.

The contact in BDO Nelson Parkhill is John Churchill (ph. (02) 9286 5495, fax (02) 9286 5599).

Yours faithfully

BDO Nelson Parkhill

John Churchill (Partner)

Paragraph 39

The national objective of equity naturally extends only to the Australian border. In making commercial decisions however, the tax burden element is frequently compared not only with others in similar circumstances in Australia, but also outside of Australia. For entities above the individual level (companies, trusts, super funds etc), horizontal and vertical equity may be more important at an international level, and for this reason it is equity at this level which is desirable. It is submitted that the results of the information paper to be released in December (comparing Australia’s tax system with other countries) be included in an assessment of desirable reforms. Particularly, the findings of countries such as New Zealand that have undertaken major simplification reforms be taken into account in weighing the desirability of any proposed measures.

Paragraph 43

External legal concepts will always be imported into the tax legislation as taxation law does not operate in a vacuum. There is a prevalent lack of defined terms central to the understanding of many provisions. For this reason where there are such external legal concepts or central provisions they should be precisely defined. It is agreed that such definitions should be consistent as far as possible with complementary of legislation such as the Corporations Law as well as relevant Accounting concepts (see also para. 6.108).

Paragraph 46

Taxing all forms of income by having regard to "equity benefits" should require administrative equity to be taken into account as well. It should be as cheap to comply if you are receiving interest income, as if you are receiving dividend income. Moreover, administrative equity should extend as between entities, it should be as cheap to comply for trusts as for companies. Differential administrative costs between forms of income or between entities reduces the value of an equity-based foundation and should therefore be taken into consideration in drafting an equity-based business tax system.

Paragraph 59

It is difficult to remember a situation where it was necessary to rely on legislation by press release. Instances where the ATO and/or Treasury have known about revenue "leakage" for a long period, and then suddenly legislate by press release are legion. On the other hand, confidential drafting and introduction of legislation into the Lower House with an effective date from that time is fully supported in certain cases (see also para 4.43).

Paragraph 72

The idea of an independent Board is laudable. However the room for "flexibility" to bring forward tax measures outside the consultative process must be precisely confined or else risk the consultative process being sidestepped as an "unnecessary impediment" to Treasury or ATO programs. The limits within which the consultative process may be circumvented should therefore be made public.

Paragraph 74

Public sector input to the Board should be limited or the process may suffer from public sector vested interests putting views contrary to the character of a review organisation, and/or attempting to dismantle proposals inconsistent with the independence of the Board.

It is submitted that the more public sector involvement there is in the Board, the more it will be seen as another arm of the ATO or Treasury.

ABOUT THE REVIEW

 

Paragraph 1.15

How will Court decisions interpreting "carrying on a business"apply to individuals investing in shares or earning interest on savings deposits and will this require a change to section 8-1? We note that there would be a lot of uncertainty from substantially altering this provision and that this would count against clarity for a long period while court cases are decided. It is submitted that an assessment of this feature be undertaken

Paragraph 2.13

Altering the tax laws so that the same economic transaction is taxed in the same way will not prevent different legal forms persisting in the wider community. For instance leases and hire purchases will still be commonly entered into. Therefore, the "same economic transaction" needs to be clearly delineated. Furthermore, it is suggested that legal debate as to what constitutes a lease arrangement will simply be replaced with legal debate as to what constitutes a "lease-like" arrangement.

 

 

The last "dot point" under paragraph 2.13 is hard to reconcile with its opening statement. On the one hand it claims that the same economic transaction should be taxed in the same way, on the other that a difference in the economic substance of a transaction should not justify differences in the current tax treatment.

 

 

In the example mentioned, the capital gains tax cost base of a company’s assets vis a vis its shares may be different. In the case of a publicly listed company, a share’s market value would no longer be able to be based simply on list price, but on a revaluation of the company’s assets . This would add enormously to compliance costs, possibly outweighing the increase in revenue the Government hopes such a measure will produce. It would also rendermarket value substitution rules significantly more expensive to comply with if the onus is upon the shareholder, or result in significant increased administrative costs if the onus is upon the company to produce regular reports on the value of the company.

Paragraph 3.3

-3.4

Regarding the statements that technical complexity arises wherever ascertaining the meaning of tax legislation is less than straightforward, and that structural complexity refers to poor structuring of provisions and can result in abuse. It is submitted that the TLIP project, whilst containing provisions individually comprehensible, often requires many disparate provisions to be read together in order to identify the tax treatment of a particular transaction. According to the conversion table in the front of the legislation, section 160ZH11 (previously a single paragraph) is now spread over nine different subsections in two different sections.

 

 

Therefore, the simplification processes already engaged have not necessarily led to a straightforward apprehension of liability. It can even be said that former 160ZH11 is now contained in a more "complex" form.

 

 

It is submitted that as far as possible, provisions relating to one event are less complex if contained within a single section of the Act. Certainly the TLIP numbering system for sections allows for this.

Paragraph 3.18

If the Courts are to interpret tax legislation with regard to the "wider national interest" then these wider national interests must be precisely defined, so as to identify a clear objective or principle. What continuity of interpretation would follow when the "wider national interest" is deemed to have changed by an incoming government, or an incumbent government disenchanted with its current course? What role will the doctrine of precedent play in such an event?

Paragraph 3.26

The statement that taxpayers are able to exploit the difference between the top marginal personal tax rate and the company tax rate to defer payments of tax is only true in limited circumstances. Taxpayers who do not direct the company, and thereby the declaration of dividends or returns of capital are not able to "exploit" the difference.

Paragraph 4.17

Regulation impact statements have traditionally understated the compliance costs and the implementation of tax policy. For instance, the summary of regulation impact statement in the Taxation Laws Amendment (Company Law Review) Bill 1998 stated that the impact was low and that companies compliance costs will be kept to a minimum because only companies entering into capital streaming or dividend substitution arrangements will need to consider the operation of the anti-avoidance provision and that the legislation implementing the general anti-avoidance provision is not complex.

 

 

It is noted that companies must still become aware of when the capital streaming rules apply and the thoroughness of the legislation dealing with it does not lead to a low compliance cost for the business community.

 

 

It is submitted that prior to the release of a regulation impact statement that a hypothetical structure "on the cusp" of the particular legislation is presented to an independent team by the mooted Advisory Board, and that the regulation impact statement is based upon the time taken by the team to determine whether the new provisions apply to that particular structure or not. This would result in fairer regulation impact statements that the Government of the day could more confidently rely upon.

Paragraph 4.43

This paragraph stated that an announcement of intent to change the tax law would allow taxpayers to frustrate the policy intent of the proposed change at a significant cost to the revenue. This position can only be defended if it can be shown that as soon as the ATO and/or Treasury become aware of revenue leakage they act to stop it. In actuality, the ATO often allow revenue leakage for a significant period of time, sometimes years, before suddenly issuing a press release, with legislation effective from that date. A recent example can be seen in the trust loss measures.

Paragraph 6.17

Regarding the structured application of expressed principles and consistency of application, it is noted that it may be difficult to ensure consistent application where expressed principles give the Commissioner more discretion than he currently has. For instance, if the highly capricious rulings programme was able to be used as a venue for interpreting the expressed principles, clarity would soon vanish, and the benefits of any consultative process eaten away. It is submitted that the structured application only allow the Commissioner very limited interpretive discretion. This would result in increased consistency and certainty for taxpayers.

Paragraph 6.54

Given the statement that economic gains and losses should be treated symmetrically, and that under paragraph 6.51 international taxation implications are to be considered, it is submitted that there would no longer be any justifiable reason to quarantine foreign income and capital from domestic income and capital, nor foreign losses from domestic losses.

 

 

Under taxation of comprehensive income relying on continual market valuations of asset, any gain in comprehension and equity may be outweighed by compliance costs. This would occur even where an annual valuation is adopted. It is submitted that compliance costs be carefully weighed prior to introducing this valuation measure.

Paragraph 6.62

Ascertaining an individual’s investments through chains of entities, seems to require some complexity in tracing rules akin to those currently contained in the CFC provisions especially where an annual asset valuation is going to occur. This seems to be the case whether there is realisation, mark to market or accruals timing.

 

 

The comprehensive income taxation system may operate to the detriment of those entities who are currently asset rich but cash poor. Such entities would be taxed on "income" they do not have and may be required to sell assets in order to pay tax, reducing their income producing capacity.

Paragraph 6.63

The Review notes that a full imputation system would go towards achieving distribution - related integration. This is hard to reconcile against recent policy "creation" stating that the wastage of franking credits was always an intended feature of the imputation system. For this reason there must be a comprehensive statement that no wastage of franking credits is part of any underlying policy.

Paragraph 6.67

Individuals in similar circumstances, i.e. people who earn only wages are not in the same circumstance as people with largely capital gains. As mentioned, one may have no ability to pay their full tax outside of disposal of their income producing asset.

Paragraph 6.68

The statement that compliance complexity increases substantially because of asset valuation requirements is worrying if it means that the cost of compliance itself may result in commercial pressure to dispose of assets. Such disposals may contribute to a volatile market in some kinds of asset, possibly even leading to deflation in some sectors.

Paragraph 6.84

By taxing substance over form, the basis of transaction taxes will still be upon form, only the new legal form will be wider than the old legal form, i.e. those various economic transactions subsumed under umbrella headings. There should be an assessment of the limits of "same economic form".

Paragraph 6.96

We agree that compliance should be integrated. It is further suggested that legislative amendment in one area that will impact upon another requires a cross-legislation response. For instance, many of the recent freedoms granted regarding share capital under the company law simplification process were simultaneously removed by amendments in the taxation law.

 

 

It is submitted that a cross-legislation response be implemented to avoid such situations arising in the future.

Paragraph 6.98

It is agreed that rules for individuals should be few and simple, however, it is difficult to understand the "necessity" for complex legislation in the case of multi-national corporations. Moreover, individual taxpayers can be subject to the highly complex Part X as an attributable taxpayer, and may also be subject to double taxation and capable of deferring tax on foreign source income. For this reason, it is submitted that efforts to simplify business tax law should not exclude complex provisions deemed "necessary" for multi-national corporations, unless these complex provisions can be shown to relate only to multi-national corporations, and even then such provision may act as a disincentive for such corporations to invest in Australia.

Paragraph 6.104

It is agreed that greater simplification would have been achieved in the TLIP process had they been able to address policy concerns. However, an inability to do so may not be the only reason that the TLIP process has not resulted in the greatest simplicity. While each new section if taken by itself reads more easily there are generally a greater number of sections to be comprehended in order to understand a particular liability or concession. This feature of the TLIP project where it is evident does not aid simplicity.

Paragraph 6.106

Given a purposive interpretation regime it is imperative that the purpose be as clear as possible. In the event that there is an amendment to an underlying policy purpose, will every provision relating to that purpose also necessarily be amended? If not, what effect will a slight change in policy have on the legal interpretation of sections specifically drafted to reflect a previous policy?

Paragraph 6.108

The use of standard rules, terminology and concepts across all relevant Acts is an excellent idea, again, what will be the effect if one imported rule, term or concept is altered - how will that affect the interpretation of the income tax provision? Will it be based upon the previous understanding, or upon the altered meaning? It is submitted that as far as possible imported, rules, terms or concepts are defined within the Income Tax Assessment Act, so that a change in meaning outside of the Tax Act does not create immediate ambiguity.

Paragraph 6.112

Whatever "desired level of certainty" in tax provisions is deemed appropriate, it is submitted that the same level be maintained across all provisions in the Tax Act. And that a greater level of ambiguity is not tolerated in anti-avoidance sections for instance.

Paragraph 6.113

It is fully agreed that there should not be a plethora of specific anti-avoidance rules. Aside from the added complexity, it raises compliance costs for taxpayers. It is further sbumittedthat the "dominant purpose" test be maintained in any general anti-avoidance provision and that it not be tightened up to a "more than incidental purpose" of obtaining a tax benefit as is commonly found in recent specific anti-avoidance rules.

Paragraph 6.132 - 6.134

One way to improve taxpayer compliance is for taxpayers to be sure of reliable tax advice from the ATO. To facilitate this it is suggested that the ATO switchboard be able to allocate specific sections, provisions or subjects of the Act to phone numbers of ATO officers. It is also recommended that the switchboard contain a running list of contacts for proposed legislation. In this way a taxpayer should be able to nominate a tax subject and immediately be connected to the person dealing with that area.

Paragraph 7.6

It is fully agreed that the interpretation of tax law needs to be independent from collection. From 1 July 1999 for instance, Self Managed Superannuation Funds will be regulated by the ATO who will also collect their taxes and who also interpret the governing legislation. It is too often the case that taxpayers must arrive in the AAT, or Federal Court before they obtain the first objective consideration of their taxation liability.

Paragraph 7.22 -7.23

It is noted that the process of legislation by press release is counter-productive with respect to the user friendly relationship deemed advantageous in paragraph 6.131ff. It is therefore agreed that it should be restricted to dire cases.

Paragraph 7.61

An independent Advisory Board is highly desirable. Furthermore, it is submitted that a statement of independence be tendered by members of the Board along the lines that no financial benefit accrues to them from the Australian Taxation Office, Treasury, or the OPC from whom they are purportedly independent.

Paragraph 7.88 - 7.89

Regarding the proposal that TLIP work would be subsumed in the implementation of the Government’s reform package. To date, the TLIP process has resulted in an increase in the volume of tax legislation. It is therefore recommended that an investigation be undertaken of whether the policy changes will more than compensate for the natural stock increase under the TLIP process so that we end up with a net stock reduction. It is also difficult to reconcile the increase in the capital gains tax legislation wrought under the TLIP process with the halving in size that the review claims the TLIP process will accomplish.

Paragraph 8.46

If it is likely that a time delay in issuing rulings would increase by having an independent assessor then this may be tolerated. It is submitted that the gain through having an independent and objective assessment of a taxpayer’s merits would outweigh any small time delay. Moreover, it is suggested that the taxpayer would be less likely to object given an independent review, so that the ultimate time in coming to a resolution of a matter would be decreased. This would also take the pressure of ATO resources. The time delay in issuing of the ruling itself should not be the only measure by which an independent assessment process is deemed desirable or otherwise.