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AUSTRALIAN BANKERS’ ASSOCIATION

Ross Robins
Associate Director

Level 42, 55 Collins Street
Melbourne Vic 3000
Telephone: 03 9667 9225
Facsimile: 03 9650 1756

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30 December 1998

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

Dear Sir

A Strong Foundation - Discussion Paper

ABA remains a strong supporter of the reform of Australia's tax system. Fundamental reform is clearly required if Australia and Australian businesses are going to be able to compete successfully in global markets. Accordingly, we are pleased to support the work of the Review of Business Taxation. Our comments on the discussion paper "A Strong Foundation" follow and should be read in the context of our support for fundamental reform of Australia's taxation system.

"A Strong Foundation" establishes a strong case for the reform of business taxation. We agree that the current system is becoming increasingly unworkable and without corrective action will fail to satisfactorily achieve the goal of raising sufficient revenue to fund Government expenditure with a minimum impact on the activities of Australian business.

Scope

We do hold concern with the scope of business income described in the paper (1:12 - 1.16). Whilst from a theoretical perspective it may appear pure to include all investment activity of individuals within the concept of business income, the paper correctly identifies that individuals would not consider such activities to be associated with business activity. This community perception cannot be simply ignored.

The taxation system has to be understandable to all Australians. Treating income from everyday savings products as business income in the hands of individuals will make little sense to them. The extent to which the business tax reforms being considered by the Review may impact upon individual taxpayers in terms of adding complexity to their relatively simple tax position cannot be overlooked. We believe it will be necessary to make distinctions between types of "business income" (under this broad definition) to ensure that the relatively simple taxation arrangements applying to individuals’ investment activities are not made more complex.

Objectives

We support the need for national objectives to guide the formulation of business taxation policy, legislation and administration. In terms of the objectives in "A Strong Foundation" we are concerned that they appear to overlook issues of international competitiveness and national savings. These issues may be implicit in the first objective of optimising economic growth. If this is the case, as a minimum, they should be explicitly stated in the description of that objective. An explicit statement will help to ensure they are not subsequently overlooked by those charged with design, implementation and administration of the tax system.

The level of national savings has been an important issue for Australia in that last decade. Whilst our position has improved it would be premature to say it was under control. There has been a significant improvement in public savings, but the level of private savings remains a concern. As discussed above, the Review includes the tax treatment of savings due to the scope of the business income concept which has been adopted. Given both the importance of national savings and the capacity of the business taxation system (due to its scope) to directly affect incentives to save, some recognition in terms of the national objectives is warranted.

Similarly, Australia's success in the future will depend more on our ability to compete globally than at any time in our history. Domestic issues close to home are often the prime drivers of changes to Australian laws; including tax laws. On occasion our international competitiveness has been adversely affected due to the focus on domestic issues. The international nature of today's markets means we must always understand the international implications of our actions. Some mention of international competitiveness must be included in the national objectives to ensure this critical issue is never overlooked.

Finally, we are not sure that the objective "facilitating simplification" properly describes the issues raised under this heading. Simplicity is only one of the necessary attributes of a good tax system with other important attributes being certainty, consistency, ease of compliance and administration as described in the paper (6.17). These attributes more properly come within the concept of efficiency. There will at times be trade offs that are necessary between simplicity and certainty and the current description may lead to an over-emphasis on simplicity.

 

Policy Design Principles

Defining the Tax Base

We agree that a clear definition of the tax base is necessary. We also agree that a number of departures are necessary from the comprehensive income tax base. However, without some principles to guide when such departures are warranted, there is a danger of this process becoming ad hoc and leading to reduced levels of cohesion and certainty.

Determining Tax Liability

Again, as high level principles the approach to integrating ownership interests and ensuring a single layer of taxation are acceptable. However, departures will again be necessary to ensure that changes to current policies along this path do not reek havoc with business. For example, the proposal with "A New Tax System" (ANTS) to tax collective investment vehicles under the business entity tax regime would provide incentives for individuals to invest directly and therefore loose the risk diversification benefits which collective investments provide. This would have serious impact on the investment decisions of individuals.

Promoting Equity

We agree.

Risk Neutrality

We welcome the initiative under this heading to bring the Taxation of Financial Arrangements to finality. This is an important issue to reduce compliance costs in the finance sector and will assist Australia to develop as a regional financial centre.

Balanced Taxation of International Investments

This principle is supported.

Tax Incentive Provision

We agree.

Reflecting Incidence and Substance

We are concerned about the principle to tax based on economic substance over form. Economic substance is not an appropriate basis. The legal form provides certainty to transactions which leads to clearer tax outcomes. Taxing based on economic form will reduce both simplicity and certainty.

 

Legislative Design Principles

The legislation design principles are supported. Their introduction would lead to improved legislation which is both simpler and provides greater certainty. In relation to anti-avoidance, it is important that such rules be limited to the specific issue which is of concern. There is a danger to legitimate activities where the scope of anti-avoidance provisions are so broad as to extend beyond the specific mischief.

Administrative Design Principles

These design principles are supported.

Reforming Business Tax Processes

ABA supports the approach of introducing cross functional teams which should produce better outcomes. However, direct consultations with affected parties need to remain a significant component in the design of a workable tax system. Such consultations must also be approached on the basis of genuinely seeking input from industry with the view to better outcomes for all.

Whilst an Advisory Board is a step forward, we do not believe it is enough to achieve fundamental change, particularly in respect of tax administration. The establishment of an independent Board for the ATO is seen as critical to both changing the culture of the ATO and achieving improved administration.

Yours faithfully

Ross Robins
Associate Director