Submission No. 51 Back to full list of submissions
Download in either PDF or RTF format


24 December, 1998

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

Commonwealth Bank of Australia
Submission on "A Strong Foundation"

The purpose of this submission is to address the major issues raised in the first discussion paper of the Ralph Committee.

We have had the opportunity to review a draft of the submission prepared on behalf of the Business Coalition for Tax Reform ("BCTR") and we are in broad agreement with that submission. We would like to make some additional points, as set out below.

General Concepts

We concur with the view of the Committee that now is the time to address the fundamental structure of the tax base. In the past the tendency has been to make continual adjustments around the fringes. As a result the last 15 years or so in particular have seen a dramatic escalation of the size and complexity of the Tax Act. At the same time we have witnessed a considerable breakdown in relations between the Australian Taxation Office and Treasury on one side and the taxpaying community on the other. The resultant waste of time and resources has been a drain on the business community for many years.

Accordingly, we concur with the BCTR’s support for the Review addressing the Terms of Reference initially by setting out key design principles and objectives. While some principles or objectives may be emphasised more strongly than others, and in this regard we may differ in some respects from the Review’s first paper, we are in overall agreement with the approach taken and are satisfied that, if used as a foundation for wide-ranging tax reform, we should see a significant improvement in tax administration in this country.



Optimising economic growth:

We concur that the tax system should neither make Australia an unattractive location for in-bound investment, nor drive existing domestic investment offshore purely on the basis of tax considerations.

Ensuring equity:

It appears that the proposal to proceed to entity taxation is seen by the Government, and possibly also the Committee, as a step in the direction of improving equity. However, entity taxation in the form proposed in the Government's 13 August 1998 paper on tax reform, does not necessarily meet this objective.

A clear distinction has to be drawn, for example, between listed trust vehicles and other trusts. Currently there is revenue neutrality between direct investment and investment through a public unit trust. The retention of this treatment is clearly justified for collective investment vehicles such as cash management trusts and property trusts, as there is no revenue leakage and smaller investors generally use these vehicles as their only means to invest in areas otherwise out of their reach. Nor are such vehicles used with any objective, or effect, of tax avoidance.

Taxing such entities as companies lessens rather than enhances equity, has the potential to severely damage the managed funds industry and consequently is likely to have a detrimental effect on national savings.

Facilitating simplification

One of the objectives of the Committee is a dramatic reduction in the size of the tax legislation. While in principle we applaud this, we would be concerned if this were set as a primary target at the expense of equity or greater clarity.

Policy design principles

One suggestion is to adopt taxation on the basis of a purer form of comprehensive income.

While founded on a comprehensive base, the existing tax system departs from comprehensive taxation in a number of ways, as pointed out in the Paper. The Review is examining measures that will bring the system closer to a pure comprehensive tax regime. We agree with the BCTR that moving to a comprehensive regime cannot be supported until the proposal has been more closely examined by the Review and all stakeholders clearly understand its ramifications.



Investment and risk neutrality:

Reference is made in the paper to the long-awaited reforms for the taxation of financial arrangements (ToFA) as a means of countering the risk arising out of increased financial innovation and globalisation. The paper indicates that the Review intends to consult widely on the taxation of the financial arrangements "with a view to bringing the ongoing examination of those arrangements to finality". That would be warmly welcomed by the Bank. Introducing ToFA would have a considerable revenue advantage of flattening the variations in tax payments and hence revenue collections attributable to the volatile nature of financial markets transactions – the timing differences which emerge can impact on company tax collections.

Legislative Design Principles

The 10th legislative design principle states that tax legislation could retain general anti-avoidance provisions but that it should be sufficiently robust to do without specific anti-avoidance provisions.

The 45 day holding period rule legislation is a clear example of where a general anti-avoidance provision would have been sufficient to deal with the policy objective but instead (or in addition) specific provisions have been introduced which are poorly conceived, poorly drafted and interfere with a wide range of commercial activities. Business should be able to be carried on without unnecessary ATO interference, but legislation of this nature makes that impossible.

Fringe Benefits Tax

We welcome the inclusion of Fringe Benefits Tax within the ambit of the Review. FBT is a substantial drain upon the Bank's resources. Much of the problem arises because of the wide range of benefits caught and the extent of record keeping that is required to support the fringe benefits tax amount payable to the Government each year. Complexity and compliance costs have never been adequately addressed in the past and we submit that they must be addressed as part of the Review.

A more fundamental issue is that currently the Bank pays 48.5% tax on loans and other benefits provided to employees whose tax rates, in most cases, are significantly lower. FBT was introduced on the basis that employers and not employees would be taxed on fringe benefits. There is no policy basis for imposing FBT at the highest marginal tax rate when the recipient’s rate is lower.



Capital gains tax

More flexibility is needed, via rollover relief, for business reorganisations so that tax is not an impediment to a restructure that otherwise makes sound economic sense.

In a similar vein, it is important that CGT rollover relief is introduced for scrip for scrip exchanges so that tax is not payable by shareholders prior to realisation of the economic profit.


Administrative design principles

We strongly support the key recommendations that the tax administration should be independent and fair, with consistent and transparent decision-making and minimal compliance cost impact.

The main specific recommendation is the establishment of an Advisory Board.

The proposed board must be independent of the ATO and have a strong supervisory role. The paper proposes that it be confined to the provision of advice, but not direction. A taxation board, with independent representation, must make the ATO more accountable. The ATO should be accountable to a board of directors in the same manner that public companies are accountable to their boards of directors. No lesser and no greater standard should be expected of the ATO.


The frank recognition of the problems with the business tax system is to be applauded and many of the recommendations, if implemented, should result in greater certainty and a reduction in compliance costs. We will be keen to comment on the more detailed proposals when they are issued.




CB Millett

Group Taxation Controller