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Submission No. 76 Back to full list of submissions
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Tax Policy to Tax Law:

Processes to Improve our Tax Legislation

Angela Ryan

Director – Taxation, ASCPA

April 1999

The ASCPA maintains copyright over this paper and its contents and any reproduction in full or in part needs to acknowledge the ASCPA as its source.

 

Table of Contents

Introduction

Executive Summary

1. Background

Making tax policy now

2. The strategic phases

3. The tactical phases

4. The operational phases

Detailed policy design
Formal detailed consultation
Approval of policy recommendations

5. The legislative phases

Writing the legislation
Passage of legislation

6. The implementation and review phases

Implementation of the legislation
Post-implementation review
Remedial issues

7. Conclusion

Appendix 1: The Advisory Board

Appendix 2: The legislative record

Appendix 3: A case study of tax policy development – the New Zealand GST

Introduction

As Australia’s leading accounting body, the Australian Society of Certified Practising Accountants (ASCPA) is working to ensure that we create a robust and fair tax system that will meet the needs of the country in the new millennium.

This paper looks at how the processes now in place to advance from tax policy to tax law can be improved. If successful, such changes will lead to tax legislation that is more certain and transparent in its application, more widely accepted by stakeholders, and less subject to change. This, in turn, will provide for substantial reductions in compliance and administration costs.

The paper builds on the recommendations made in our recently released paper dealing with the establishment of an Advisory Board. Together, these papers are designed to assist in fleshing out the welcome administrative changes signaled by the RBT on which it called for submissions.

Copies of this report (and the report dealing with the Advisory Board) are available from the ASCPA Internet site at www.cpaonline.com.au or by contacting Angela Ryan, ASCPA Director – Taxation on 03 9606 9830.

Acknowledgements

The ASCPA would like to acknowledge the valuable work of Professor Helen Nelson in preparing a first draft of this paper. In addition, we would like to thank the members of our Taxation Centre of Excellence and the National Tax Practice Committee for input in preparing this paper.

Executive Summary

The recommendations in this paper would, if implemented, provide for a fully structured and integrated approach in relation to every aspect of the development of tax law – from policy to legislation. The aim is to get higher quality policy decisions that would be translated into clear and better legislation. Better legislation will, in turn, deliver more certainty, stability and consistency in tax law, that will reduce compliance and administration costs. In an environment of major tax upheaval, such change is not only necessary, it is vital if the benefits of tax reform are to be delivered in practice.

The paper builds on some of the suggestions from the RBT in A Strong Foundation, including providing a forward work program for business taxation, and the establishment of integrated teams (incorporating officials from Treasury, ATO and OPC). However, it takes a more holistic view of the tax law making process, and builds in other aspects of tax law design, including most importantly the consultative mechanisms.

The current processes in getting from tax policy to tax law remain largely haphazard. Despite a wide array of consultative groups, there is a strong perception that, aside from a few notable exceptions, the work of these groups is largely uncoordinated and leads to little effective change. The opportunities to consult on some important aspects of tax design are very limited, and the extent of consultation on any particular issue appears more a matter of chance than deliberate design.

Legislation is often introduced into Parliament with little or no effective consultation, and any amendments then have to be made through the resource-sapping (and often inappropriate) Parliamentary process. Many amendments are made "just in time" and there is little acknowledgement, or even understanding, of the problems this creates for systems development or business planning and advice. The extent of required amendments and the increasing pressure to accommodate change outside of the legislation (through supporting rulings and the like), are making the system increasingly complex and unwieldy.

With all tax policy being turned into tax law in this way, we end up with a poorly coordinated system that is subject to significant ongoing amendment. That imposes inordinate administrative costs for the Government (including the call on Parliamentary and Ministerial time) and compliance costs. There must be a better way.

In this paper we recommend a more structured and consistent approach to making tax policy changes and then converting them into law. The approach would be applied in a consistent and comprehensive manner to all tax change.

Specifically, tax law development should be based on five distinct phases:

  • Strategic phases – these involve the development of an economic strategy, a fiscal strategy and a three-year revenue strategy;
  • Tactical phases – these involve the development of a three-year work program and an annual resource plan;
  • Operational phases – these involve detailed policy design, formal detailed consultation, and Ministerial and Cabinet approval of detailed policy recommendations;
  • Legislative phases – these can occur in parallel with the operational phases, and involve the translation of the detailed policy recommendations into legislation; and
  • Implementation and review phases – these phases involve the implementation of legislation, post-implementation review of legislation, and the identification of remedial issues.

1. Background

This paper focuses on how the process of getting from tax policy to tax law can be improved. Recommendations for change are suggested in relation to each stage of the process, and commentary on suggestions for change made by the RBT in its first report, A Strong Foundation are also discussed.

The paper is separated into five separate sections, reflecting the five distinct stages that are passed through in getting from policy to law. These five stages are borrowed from the Generic Tax Policy Process applied in New Zealand. These phases are:

  • Strategic phases – these involve the development of an economic strategy, a fiscal strategy and a three-year revenue strategy;
  • Tactical phases – these involve the development of a three-year work program and an annual resource plan;
  • Operational phases – these involve detailed policy design, formal detailed consultation, and Ministerial and Cabinet approval of detailed policy recommendations;
  • Legislative phases – these can occur in parallel with the operational phases, and involve the translation of the detailed policy recommendations into legislation; and
  • Implementation and review phases – these phases involve the implementation of legislation, post-implementation review of legislation, and the identification of remedial issues.

The aim of this paper is to recommend a structured, holistic approach to tax policy design that would be applied in a consistent and comprehensive manner to all tax change. By following such a framework, it should be possible to achieve better tax law with recourse to less public and private sector resources.

Before looking at possible reforms, it is useful to begin by considering how we got to where we are now. The tax legislation we have today is failing, and much of that failure is due to the politics and processes employed in tax policy making.

Making tax policy now

The Australian approach to tax law-making is characterised by a political process centered around diverse demands from competing interests, and a legislative output that builds on the past with a series of amendments and adjustments to existing provisions. While this can yield change, it does not permit fundamental reform. Rather, change comes by building on the past in small steps. The pressure to respond to the demands of organised interests displaces consideration of broader issues. The incremental style of decision-making excludes the possibility of comprehensive review.

In this environment, the role of the legislators is one of arbitrating the group conflict, and dealing with specific group demands by granting or denying concessions in statutory form. The outcome is increasingly complex legislation. Time increases the complexity and narrows further the potential for fundamental reform.

An absence of review promotes legislative obesity. The constant fiddling at the edges indicative of incremental decision-making feeds back into the policy-making system by creating an ever-expanding file of tax law.

The incremental approach is reinforced by the constant need to respond to court challenges to existing tax provisions. A typical cycle in tax legislation is one of legislative amendment, leading to litigation, leading to identification of a loophole, leading to a new amendment, leading to new litigation and so forth. The result is band-aid legislation: the Act springs a leak, a band-aid amendment is slapped on, the leak bursts through another overstretched provision, another band-aid is applied. The consequence of band-aid legislation is an ever more amended, lengthier and more complex Act, with the complexity feeding back into the legislative process.

When the application of band-aids is just not enough to keep the system afloat, a groundswell of support for reform can develop. Given such support, there is a chance of adopting a more comprehensive approach to tax reform. A comprehensive approach has the potential to remedy some of the problems of the incremental approach.

However, to truly remedy the shortcomings of the system, we need to take a comprehensive approach to tax change at all times, not just when the system has broken down so badly that there is no alternative. That calls for an orderly, systematic, and timely approach to tax change. Such an approach should replace the band-aids and knee jerk responses that have come to characterise so much of the system today.

We need to replace the piece-meal, issue by issue approach, with a fully coordinated strategy that takes into account the time needed for effective consultation, the time needed for effective Parliamentary scrutiny, and the time needed for taxpayers to adjust with systems changes and/or transitional changes.

With a broadly-based political commitment to tax reform, now is the time to reform our processes of getting tax change implemented so that the benefits of reform are realised, and what is more, that those benefits are enduring.

This paper sets out a process that could greatly assist in bringing about such fundamental reform.

2. The strategic phases

The strategic phases of tax policy relate to the development of an economic strategy, a fiscal strategy and a revenue strategy. This part of the process is often overlooked in discussion of tax policy, as it is seen to be much more wide-ranging than tax policy itself.

The breadth of these strategic phases is certainly very broad, but in order to be truly strategic in tax policy development it is essential to recognise that the ultimate size of tax collections will be intimately bound up with the expenditure decisions of government. It is only by focussing on these strategic issues that issues such as the relative reliance on alternative tax bases, appropriate tax rates and other such topics can be properly considered.

At the moment, these phases of the process are handled by the Government and its senior Ministers – most notably the Prime Minister, the Treasurer and the Minister for Finance, in close consultation with the Cabinet. Typically, the output from these strategic phases is in the form of the annual Budget that sets out past and expected revenues and expenditures, together with the rationale for pursuing the economic and fiscal strategy that this revenue and expenditure picture presents.

These phases involve substantial input from key policy departments, with relatively little external input (though it is not uncommon for external organisations to submit pre-Budget submissions).

We consider that the extensive Budget documentation that is available and the easy public access to that information is a strength of the existing processes, and does not require any significant reform.

That is not to say, however, that it is appropriate that much tax change be announced in the Budget without prior consultation. That is a separate issue that relates to other phases in the process. It is the revenue strategy that we are dealing with in this Section, not the specific revenue measures.

3. The tactical phases

The tactical phases involve developing a forward work program, together with a resourcing plan to undertake that work.

The RBT (Review of Business Taxation 1998, p 100) have suggested that the Treasurer should provide a forward work program for business tax policy, which would be drafted by the Treasury and ATO and submitted for public consultation before being finalised and approved by the Treasurer. The RBT recognises that the plan should include an estimate of required resources, and an indication of the benefits of undertaking the work/risks of not doing it.

This is certainly a step in the right direction. In opening up the policy process to public input at this early stage, there is an opportunity to build confidence and trust between taxpayers and the revenue authorities. However, the usefulness of a forward work program would be much stronger if it included all taxation matters, not just those pertaining to business tax. Also, the RBT is not clear on the time frame for the work program, but in New Zealand the tactical phases involve the development of a rolling three-year work program and an annual resource plan. A three-year plan would be essential.

We would recommend that an Advisory Board be established. The Board should play a major role in the development and finalisation of the work program. The Board should also be actively involved in the other stages of tax policy development. We have prepared a separate submission on the role and functions of the Board. Key findings are summarised in Appendix 1.

The preparation of the three-year program should involve:

  • The initial scoping of broad policy proposals. External input should be obtained by a "green paper" that included Government objectives and possibly policy options for public consultation;
  • Prioritising and sequencing of tax policy initiatives. This should include estimated time-frames for developing, legislating and implementing those policy initiatives in the year ahead and the resources required; and
  • The strategy for obtaining external input through the public release of a more detailed "white paper" and communicating policy decisions.

Ideally, the work program would include the expected revenue consequences associated with any areas of review. It would also include some sensitivity analysis, so that areas of possible reform that are reliant on particular revenue outcomes are identified. For example, the work program might include a project to look at the costs and benefits of tax rate alignment, recognising that achievement of that goal may not be possible in the absence of other major revenue raising activities that could also be addressed in another part of the program.

To be truly effective, the work program and the resource plan needs to encompass the three separate agencies that are involved in Commonwealth Government tax policy and law making: the Treasury, the Australian Taxation Office (ATO) and the Office of Parliamentary Counsel (OPC).

At the moment, the expertise from the Treasury, ATO and OPC are applied sequentially. The initiation and development of policy is primarily the responsibility of Treasury, in the context of its responsibilities for economic policy generally. The ATO, the agency charged with implementation of tax laws, and therefore the body with the ‘hands-on’ experience, prepares the policy for drafting by the OPC. The process entails writing drafting instructions and also, where necessary, filling in the details - putting the meat on the Treasury bones. A specially designated group within ATO, the Legislative Services Group, carries out the work. OPC has responsibility for the actual legislative drafting.

The sequential approach, although logical, increases the risks of ‘policy drift’. ‘Policy drift’ refers to the changes in interpretation that occur when even the most specific policy instructions are handed along the line. It occurs even when those involved are conscientious in attempting to carry out government policy.

Worse still, this fragmented approach to policy development can lead to the Government losing control of its own policy decisions. There may be occasions where parties to the process actually prefer to see "policy drift", so that wider or possibly conflicting agendas can be pursued under the guise of an agreed policy decision. This is detrimental to transparent policy making.

Arrangements to ensure coordination between the agencies might be in place, but nevertheless, the division of functions will encourage each agency to bring its own specific focus to the policy, without necessarily considering - or even being aware of - the implications overall. This fragmented approach is detrimental to the development of coherent policy output and possibly contributes to legislative complexity (Arnold 1990: 387-90; Review of Business Taxation 1998: 47-8).

Similar fragmentation in New Zealand, with Treasury responsible for the concepts and macro aspects of tax policy development and Inland Revenue (IRD) for the more detailed aspects, was met with an upgrading of IRD’s policy development resources through the establishment of a Policy Advice Division. As part of the Generic Tax Policy Process (GTPP) recommended by the Organisational Review Committee (Richardson Committee), Treasury and the strengthened IRD and their respective Ministers are left to determine their respective roles in policy development, in accordance with the comparative advantage of each department. The arrangement demands close liaison between the agencies. Coordination takes place with assistance of the Officials Tax Committee (OTC) comprising officials from the Department of the Prime Minister and Cabinet, Treasury and IRD. This committee coordinates those policy issues that have wider implications and require Prime Ministerial endorsement. The OTC reports to the Prime Minister.

The protocol agreed between Treasury and IRD provides that on matters of significant policy content, the Treasurer and the Minister of Finance and Revenue receive official advice simultaneously and in a joint paper. This paper is normally prepared by the OTC, under the chairmanship of the Department of the Prime Minister and Cabinet (DPMC).

This protocol and other associated reforms provide one way of ensuring greater coordination between the key players involved in tax policy advice. The New Zealand process appears demanding of time and staff resources, but such a coordinated approach is likely to save resources in the long run if differences of view can be aired and resolved early in the process. Such forums may also be helpful in ensuring some contestibility of advice, so that issues are giving a thorough airing and discussion before Ministers receive advice.

Direct involvement by DPMC in the tax policy development process represents a departure from current Australian practice. There are, however, officials in DPMC who provide advice to the Prime Minister on tax policy and administration matters, independent of that provided by Treasury or the ATO. On occasions, DPMC is called upon to chair groups of officials to prepare papers on tax issues, particularly where there is a strong difference of opinion among departmental officials. In this way, the "troubleshooting" role of DPMC is largely common to both countries.

In the Australian case, Arnold’s proposal (1990:389-90) for an integrated policymaking and legal drafting process by merging the relevant divisions from each of the three agencies currently involved in tax policy development has the advantage of bringing together the different perspectives from the moment of policy initiation.

There would be no advantage in creating a body entirely separate from the respective agencies. It would be more a matter of institutionalising current coordination machinery. It would provide an authoritative central body responsible for overseeing all stages of the tax policy development process. It would meet the policy drift problem, at least during the formulation stage. It might also alleviate the complexity problem.

This sort of improved coordination is what is proposed by the RBT. Specifically, the RBT notes that in the development of policy and the preparation of legislation, there is a lack of integration between the Treasury, the ATO and the OPC. The RBT suggests (Review of Business Taxation 1998:104) that closer integration would be desirable, with "integrated teams" involving representatives from all three agencies working together, with clear allocation of responsibility for developing policy, legislation and administration.

We see real merit in these proposals, and heartily endorse them. We would recommend that all three agencies should be involved in the development of the forward work program and the annual resource plan.

4. The operational phases

The operational phases of the process involve detailed policy design, formal detailed consultation, and Ministerial and Cabinet approval of detailed policy recommendations. We can consider each of these in turn.

Detailed policy design

The detailed policy design phase should involve a number of options (that are not mutually exclusive). The options chosen would depend on the nature of the issue under consideration. Options include:

  • Seconding personnel from the private sector to help with the detailed design issues;
  • Setting up an advisory panel which could prepare a report for the Treasurer on particular design issues;
  • Setting up a Consultative Committee to take submissions and prepare a report for the Treasurer on policy design issues; and/or
  • Inviting submissions on a Consultative Document that has been prepared by the integrated teams.

Formal detailed consultation

Once some of the detailed policy design issues have been settled, it is then possible to undertake formal detailed consultation, which should also include a communications phase. This phase of consultation could take place in a number of ways, that could be related to the detailed policy design phase.

This phase could build on the ATO’s currently extensive consultative machinery that provides for over 350 representative positions for community consultation. Their policy input, however, is limited. According to the RBT (Review of Business Taxation 1998:49-50, 143): "...these arrangements are largely in relation to administrative matters. While these bodies may raise policy issues, they are rarely able to progress them".

While Treasury retains primary responsibility for policy initiation, and while the ATO’s primary focus is implementation, it is not surprising, and probably fitting, that outside expert advice to the ATO should concern mainly administrative matters. In the absence of a more integrated approach to tax policy development, ATO can influence, but not itself initiate, formulation of policy. A major advantage of having the integrated teams is that consultation by Advisory bodies could occur with those teams, so the frustrations and problems caused by distinguishing between "big P" policy, "small p" policy and administration would disappear.

Nevertheless, there are serious concerns about the existing consultative mechanisms, so it would be better to coordinate this consultation through an Advisory Board (see our separate paper on this issue).

Public consultation is a key ingredient of tax reform and successful implementation of tax change. Tax laws necessarily rely to a large extent on voluntary compliance. Such compliance is much more likely if people feel they have had a chance to participate in the law making process, and feel they have contributed to the system rather than having it imposed on them. People will also be more willing to comply if they consider there has been some effort to minimise the costs they have to incur in complying. Reforms are likely to be much more enduring if there is acceptance of those reforms and this relies heavily on public information and education, which should be part of the consultation process.

Approval of policy recommendations

After this extensive consultative phase, the Treasurer would then seek approval from Cabinet of the detailed policy decisions. This stage would not be subject to external review.

It may be argued that policy is the preserve of the Treasurer, and that opening the process up in this way presents substantial risks, particularly if it impedes quick action in bringing forward policy changes. The Commonwealth’s own record on tax change is that without proper consultation, there is a high risk of policy indecision and/or reversal.

The Commonwealth tax reform record is notable for the number of decisions implemented and then reversed, and proposals announced but then abandoned. Indecision and decision not to take the decision introduce an air of uncertainty and arbitrariness to the record of tax changes. History is riddled with measures that were introduced and later reversed including:

  • personal income tax indexation, introduced 1976, reduced by half 1977, temporarily abolished 1979, abolished 1981;
  • general concessional and rebate system introduced 1975, dependant children rebates abolished and combined with child endowment to create family allowance 1976, general rebate scheme replaced by general personal income tax exemption 1977, concessional rebates except for net medical expenses abolished 1985;
  • investment allowance abolished 1973, reintroduced 1975, reduced 1978, further reduced 1981, abolished 1985;
  • concessional deduction for home loan interest payments introduced 1974, abolished 1979, reintroduced 1982, phased out 1983;
  • property income surcharge adopted 1974, discontinued 1975;
  • stock valuation adjustment introduced 1976, abolished 1979;
  • limitation placed on negative gearing of rental properties 1985, lifted 1987;
  • tax allowance for research and development expenditures reduced 1991, decision reversed 1992.

There are, also, numerous more recent examples. While it is not uncommon for new policies to require a period for adjustment, the above record is one of reversed decisions and apparent ‘knee-jerk’ decision-making, rather than readjustments and streamlining. Nor do the frequent reversals denote changes of government. Most of the decisions taken and then reversed are the work of the same government.

Frequent chopping and changing creates an aura of uncertainty. Uncertainty in public policy diminishes legitimacy, encourages non-compliance and complicates enforcement. In so far as the apparent uncertainty spills over to a sense of arbitrariness in decision-making, legitimacy, compliance and ease of enforcement are reduced further.

A more open and thorough consultative process at an early stage of policy consideration could reduce the administrative and compliance costs that accompany such fragmented change.

5. The legislative phases

The legislative phases could occur in parallel with the operational phases and would involve translation of the detailed policy recommendations into legislation. This phase would also involve securing passage of the legislation.

Writing the legislation

Tax - in particular, income tax - has become an increasingly prominent component of the legislative timetable. Since 1990, the Income Tax Assessment Act 1936 Act has expanded in size from about 1500 pages to almost 4,000 (Review of Business Taxation 1998:14).

The Commonwealth Parliament passes over 170 Acts annually. Since the 1970s, almost one-third of the output has comprised legislation dealing with tax revenue. Since 1976, in particular, there has been a notable leap in the amount of tax legislation presented to the legislature. The National Tax Summit in 1985 resulted in "over 750 pages of new tax laws and over 1200 pages of explanatory material for that year alone" (Commissioner of Taxation, Annual Report 1985-86). Tax measures peaked at 37.1 per cent of total legislative output during the first term of the Howard Coalition Government, 1996-98. Appendix 2 provides further details.

As described above, the Legislative Services Group in the ATO provide the drafting instructions for the OPC, which has the responsibility for the actual legislative drafting. The question that appears to dominate the drafting process at the moment is, will the law, as drafted, do the job required of it. Often, though, the real question should be, is this the best way to do the job? Earlier consultation should allow for exploration of this question before drafting begins. Only then can legislation hope to meet world’s best practice. Legislation should not just do the job, it should do it in the best way possible.

It is widely acknowledged that one of the major stresses in the system in recent years has been the substantial call on the resources committed to legislative drafting. One of the benefits of a three-year forward program and an annual resourcing plan would be to perhaps identify this problem at an early stage and to remedy it.

Given the stresses on the drafting resources, the need to provide exposure draft legislation and to have time for adequate external review is a pressing and urgent matter. The need to consult on legislation before it enters Parliament cannot be stressed enough. The need to amend legislation because of policy change will be reduced if the policy decisions themselves have been the subject of extensive consultation under phases two and three. Just as importantly, the need to amend legislation because it is defective or flawed will also be reduced if that legislation is subject to consultation before it is introduced into Parliament.

One of the major constraints on fixing defective or flawed legislation is the pressure imposed by the lack of Parliamentary time. The best evidence of this is that it is widely recognised on all sides that it would be desirable to have an annual technical corrections Bill. Despite the strong case for such a Bill, it is ruled out because of other more pressing priorities. We need to find better ways to deal with technical corrections – preferably by removing the need for them!

This is an area of major concern. Two recent examples help make the point.

First, the recently introduced Fringe Benefits Tax Reporting Bills were followed very closely by a series of amendments that passed into law literally a few days before they were to become effective. This led to confusion on the part of taxpayers, and brings the whole system into disrepute. It gives the clear impression that the left hand does not know what the right hand is doing.

Secondly, the voluminous GST Bills were introduced into Parliament with very little external review, although there was some involvement of externals in the drafting process. It is impossible to think that any legislative change of that magnitude is going to be implemented without the need for numerous technical corrections. The sheer size of the task means this is inevitable. How much smoother the process may have been if the legislation had been exposed for consultative input before being introduced into Parliament. Many of the technicalities (down to such things as typographical errors and cross-referencing mistakes) should not have to take the time and resources of Parliament.

One of the dilemmas that arises is that Parliament may well take this view (as it has in the case of technical corrections bills), and as a result taxpayers are left to comply with defective law. This is a major body blow to a system that is intended to engender confidence and relies on voluntary compliance. Worse still, other non-Parliamentary mechanisms, such as rulings or determinations, may be made in an attempt to paper over the problems of legislation that is known to be defective, but which cannot be fixed because of these Parliamentary constraints. For taxpayers struggling to come to grips with what will be a literal avalanche of new law emanating from the tax reform program, the need to keep abreast of rulings and determinations as well is particularly burdensome. It sets the stage for inadvertent non-compliance. Reliance on rulings to fix the problems of defective law make those rulings quasi-law and usurp the role of Parliament.

All of this suggests that consultation at the legislative stage should be extensive, and occur prior to the introduction of the Bills into Parliament. This is not in any way intended to sidestep the scrutiny of Parliament – it will still occur. Rather, it is intended to reduce the number of issues that need to be resolved in the Parliamentary arena, and free Parliamentary resources to look at issues of real concern to it – policy matters rather than technicalities.

The substantial bottlenecks already in the system in relation to tax legislation are not going to get any better as more and more legislation is required to introduce tax reform. Processes outside of those in Parliament need to be improved to take pressure off those bottlenecks. Poor legislation creates only further pressure, as additional amendments are required. The process can only improve if the quality of the legislation presented to Parliament improves.

Passage of legislation

Once legislation is introduced, passage needs to be secured through the House of Representatives and the Senate. In that process, there can be much consultation and discussion but, in the area of tax policy, much of this seems to consume a large volume of resources (both public and private) with relatively little benefit from the process. If the policy and legislation that is before the Parliament has been subject to extensive consultation, there is some prospect of reducing the call of that legislation on Parliamentary time and resources.

It is entirely appropriate that Parliamentary Committees scrutinise legislation, and that the Parliament conducts its own enquiries as it sees fit. Nevertheless, much of tax law involves matters of detail, requiring expertise that is not expected of Parliamentarians who must, by the nature of their positions, be generalists. The Parliamentary process is not an effective forum for much of the discussion that needs to take place over legislative detail on tax matters. Parliament is weighed down by its own administrative bureaucracy. For example, on technical matters many of those who appear before Committees would be happy to dispense with the Hansard reporting of every word that is said, if it meant instead that resources could be put into the technical changes being called for. Clearly this cannot happen, so other means must be found to focus Parliamentary resources where they can add most value.

6. The implementation and review phases

The final phases in the process involve the implementation of the legislation, the post-implementation review of legislation and the identification of remedial issues.

Implementation of the legislation

In looking at implementation of the legislation, the whole process of informing and educating not just the community, but the ATO itself, needs to be considered. The implementation phase is critical to the success of wide-ranging or major change.

Most importantly, there is a need to communicate to all players specifically what the legislation is trying to achieve, and how it will apply in practice. To deliver such information to ATO staff and the wider community requires a broad range of input from a wide spectrum of people reflecting the experience and knowledge of taxpayers throughout Australia.

In a separate submission, we have recommended a number of measures to smooth the implementation of tax reform for small business. These measures could be used in a generic way to assist in implementing other reforms. They include establishing a separate information and education agency for the GST and building on the efforts made by the ATO to physically separate its information and enforcement arms. This could include providing such things as information booths in shopping centres, having toll free information lines and providing field visits by ATO information officers.

Post-implementation review

In a fast-changing world, tax policy cannot afford to stand still. Policies need to be periodically reviewed and assessed. Following on from the general approach recommended for new policy, a review of existing policy should also involve a consultative process.

Where issues are to be reviewed they can be identified and included in the forward work program. To avoid the band-aid approach of the past, it is important that such reviews take a birds-eye view of the entire body of legislation and look for systemic rather than piece-meal reforms if required (see Appendix 3 for such a review of the GST in New Zealand).

The advantage of such reviews is that they can focus back on the foundations of the tax itself, with reforms linked to the principles and goals of the system over all. That, in itself, should reduce the amount of piecemeal change that is so costly in terms of compliance and administration. It also allows for a "reality check" on how the legislation is operating in practice. Importantly, such reviews also allow taxpayers to "buy in" to the process so that they feel part of the system, rather than having it imposed upon them.

Remedial issues

It is important to ensure that remedial issues are identified and dealt with appropriately. Again, this could be assisted by a consultative approach, with the Advisory Board and other consultative groups identifying issues that need to be actioned, as well as officials doing so.

Too often in the past, solutions to these remedial issues has occurred in a piecemeal way, without reference to the broader policy or legislative canvass. It is imperative that remedial changes are handled in a way that does more than put a band-aid on the immediate problem. Knee-jerk responses should be avoided at all costs. Any change needs to be done in a way that reflects and meshes with other changes occurring in the system. Possible changes also need to take account of broader implications in other areas that are not necessarily part of the immediate problem. It is likely that some remedial issues are best handled as part of a broader post-legislative review, as described above.

7. Conclusion

It is apparent that the existing mechanisms to get from tax policy to tax law are certainly very resource intensive. But despite the huge commitment of resources, it remains the case that much of our tax law remains difficult to deal with, imposing huge compliance and administration costs. Much of the failure of our system stems from the way we make policy decisions, and then the processes we go through to turn those decisions into tax law.

At the heart of the problem appears to be three main issues:

  • Tax change is often made on a piece-meal basis, with no underlying strategy or reference to underlying principles and goals;
  • Consultation often comes too late in the process, so that even sensible and welcome change on which everyone agrees is hard to make; and
  • Consultation often occurs in the wrong forum, or is insufficiently coordinated to make any realistic impact.

Substantial improvements could be made by adopting a more structured and holistic approach to the development of tax policy and tax law along the lines of the Generic Tax Policy Process applied in New Zealand.

Appendix 1: The Advisory Board

In a separate submission to the RBT, we have recommended that an Advisory Board be established. The Board would be involved in every aspect of the development of tax law – from policy to legislation. The aim is to get higher quality policy decisions that would be translated into clear and better legislation.

We see the prime functions of an Advisory Board to be:

  • To provide recommendations to the Treasurer on priorities and issues in relation to tax policy and tax legislation (where necessary on a confidential basis); and
  • To work with the integrated teams to ensure that the process of moving from tax policy to tax law includes effective and meaningful consultation with the private sector at the appropriate time.

The model we have set out for the Advisory Board is broader than that envisaged by the RBT in the following areas:

  • The Board should have a policy role, insofar as the Board would be able to provide comment to the Treasurer on the forward work program, and suggest policy issues to be included on that program;
  • The Board should be able to advise on tax matters beyond the scope of business taxation alone;
  • Subject to the Treasurer’s approval, the Board should be able to interact with the integrated teams in any way it felt appropriate to ensure smooth and effective tax policy and tax administration. This could include consulting with private sector groups, establishing specialist cells to assist in critiquing new tax legislation and the like; and
  • The existence of the Board, its functions and related administrative arrangements, should be enshrined in legislation.

In relation to the appointment and structure of the Board we recommend the following:

  • The ATO Board would comprise 10 members, appointed by the Treasurer with the consent of Cabinet;
  • Membership would include the Commissioner of Taxation, the Head of the Treasury (or their designate); a representative from the Office of Parliamentary Counsel; the senior tax advisor from the Treasurer’s office (or Assistant Treasurer’s office); and six ‘private sector’ members;
  • A majority, but not all, private sector members would be appointed for their expertise in federal taxation laws. Members would not be chosen as representatives of particular bodies or groups, but rather on the basis of their skill or expertise in a relevant area;
  • Private sector members would be appointed on the basis of merit alone, and would be subject to stringent ethical obligations (in particular to avoid real or apparent conflicts of interest);
  • Private sector members would be appointed for five years, with a maximum appointment of two terms. They would be remunerated appropriately; and
  • The Board would be required to meet not less than six times per annum, and to table a report to Parliament on its activities each year.

We consider that such a Board, if properly funded, would go a long way to overcoming some of the problems with the existing consultative arrangements. It would play a key role in establishing a higher degree of trust in relations between taxpayers and the revenue authorities. It would also ensure the efficient use of public and private sector resources to deliver better tax policy and tax law for the benefit of the entire community.

Appendix 2: The legislative record

Tax legislation has been an item on the Commonwealth parliamentary agenda since 1901, when the first Parliament passed the first tax measures, the Customs Act and the Beer Excise Act (Act Nos. 6 & 7, respectively). Since then, Commonwealth laws relating to taxes have expanded in number, size and scope. The Commonwealth introduced land tax in 1910 and national estate duties in 1914. It entered the income tax field in 1915 (Smith 1993).

Today, the bulk of the tax legislative package comprises taxes in four main areas: individual and company income tax measures, including annual tax rates, changes in the rate scale, anti-avoidance measures, international agreements and administrative provisions; primary production taxes, including mainly charges and levies on primary industry exports; customs and excise measures; and sales tax legislation, imposing an indirect tax on the manufacture, use or distribution of certain goods. The remainder is made up of items such as measures relating to the territories (Australian Capital Territory and Northern Territory) and to more specific tax policies, such as higher education charges.

Tax - in particular, income tax - has become an increasingly prominent component of the legislative timetable. The immediate impact of legislative activity can be seen in the pages of the Income Tax Assessment Act 1936. Since 1990, the Act has expanded in size from about 1500 pages to almost 4,000 (Review of Business Taxation 1998:14). Lynch and Ziegler’s study (1987) of the Income Tax Assessment Act, 1936-87, examined the almost 4000 amendments made to the Act during the fifty year period, 1936-85. They listed 2816 amendments to existing sections, 909 new sections added to the Act and 249 sections repealed. Their analysis included the observation that most amendments appeared to arise as a result of loopholes identified through litigation.

The Commonwealth Parliament passes over 170 Acts annually. Since the 1970s, almost one-third of the output has comprised legislation dealing with tax revenue. Since 1976, in particular, there has been a notable leap in the amount of tax legislation presented to the legislature. During the Whitlam Labor government (1972-75), tax measures accounted for 19.7 per cent of the total legislative output. Tax legislation climbed to 31.9 per cent of total output under the Fraser Coalition government (1975-83). It remained at about that level with subsequent governments, peaking at 37.1 per cent of total legislative output during the first term of the Howard coalition government, 1996-98. Table 1 indicates the increased activity.

Table 1: Commonwealth Tax Legislation, 1973-1998

Tax area: 1973-75 Whitlam Govt.

% of total tax output

1976-82 Fraser Govt.

% of total tax output

1983-91 Hawke Govt.

% of total tax output

1992-95 Keating Govt.

% of total tax output

1996-98 Howard Govt.

% of total tax output

Income tax 21.0 27.0 37.2 35.7 54.2
Primary production 36.0 28.0 26.3 33.4 22.9
Customs & excise 29.0 24.8 17.6 16.9 18.9
Sales tax 12.0 13.4 12.7 10.7 3.3
Other 2.0 6.8 6.3 3.1 0.7
Total no. tax-related measures 100 411 495 224 153
Total no. Acts 508 1,289 1,574 745 412
Tax Acts as % of total 19.7 31.9 31.4 30.1 37.1

Structural factors account, in part, for the large annual legislative output. The Australian Constitution (s. 55) provides that laws imposing taxes, with the exception of those concerning customs and excise duties, may deal with one subject of taxation only. The provision is intended to ensure that new taxes are ‘up-front’ and not hidden away in other legislation or tacked on to bills dealing with other matters. It anticipates also any temptation to hold the parliament to ransom by making desirable policy measures conditional upon the introduction of a new tax.

The annual budget cycle is a further trigger for legislative activity. The critical link between a government’s plans to expand, reduce or simply maintain programs and its revenue-raising capacities means that tax rates, tax scales, exemption threshholds and rebates and concessions are under constant review. Even minor adjustments in taxes require legislative endorsement.

Court cases provide an additional legislative stimulant. A considerable proportion of amending legislation arises in response to loopholes identified following litigation. Tax law is an identified area of legal expertise and litigation is a large part of the politics of taxation.

Finally, a notable proportion of amending legislation is consequential, that is, arises from the linkages between tax provisions and related public policy areas. Tax legislative provisions can extend into areas as diverse as, for instance, social welfare, veterans’ affairs, court jurisdictions and the defence forces. From observation, the overlap with other policy areas is increasing as governments make more frequent use of taxation as a tool for promoting policies in other areas.

Appendix 3: A case study of tax policy development – the New Zealand GST

Although the Generic Tax Policy Process was only introduced in 1995 in New Zealand, it is interesting to look back on the processes that accompanied the introduction of the GST. The process seems to be one of the main reasons that, 12 years on, the tax has such wide acceptance in the general community. It is a case study of how a successful policy design process can be as fundamental to tax reform as good policy itself.

In essence, the New Zealand approach provided for discussion and consultation, but within a framework set by the Government. The Finance Minister, Roger Douglas, allowed ample room for changes to his proposed reforms, but the original reform concept remained in place.

The intended introduction of a broad based consumption tax, GST, was announced in the 1984 Budget. A booklet known as the "Red Paper" outlined the economic reasons for the introduction of a GST.

Following this was the release of a discussion paper in March 1985, the White Paper on the Goods and Services Tax, which included draft legislation. Release of the White Paper was followed by the appointment of a private sector GST advisory panel of four to receive submissions (over 1400 were received). The panel’s report was influential in shaping the final content of the legislation, particularly regarding the impact on small business and importers and exporters. The Government accepted most of the panel’s suggestions.

Sandford (1993:212, see also 66-8) observed that the process of consultation in New Zealand contributed not only to "getting things right and practical", but served also to contain opposition to the proposals. He concluded that the criteria for success included that:

  • The policy was drafted in clear terms;
  • The right people were chosen for the consultation process (the chair of the GST panel was an economist and businessman acceptable to the business community, as well as being a former election candidate for the opposition party);
  • The Committee members were well paid, and had a clear brief; and
  • The time frame was realistic.

Following on from that, the GST was supported by a wide-ranging information and education program, with a separate body established to undertake the task – the GST Coordinating Office.

While changes of a remedial nature have been made since that time, the first major review of the GST occurred this year. Again, the process has been open and consultative, with the release in March 1999 of a discussion document, with a call for submissions by 30 April 1999.

References

Arnold, Brian J (1990), ‘The Process of Tax Policy Formulation in Australia, Canada and New Zealand’, Australian Tax Forum, 7(4), 379-94

Lynch, Anthony & Ziegler, Peter (1987) 'Graphical Analysis of Amendments to the Income Tax Assessment Act (1936-87)', Australian Tax Forum, 4(4), 529-46

Review of Business Taxation (Ralph Report) (1998), A Strong Foundation. Discussion Paper: Establishing objectives, principles and processes, AGPS, November

Sandford, Cedric (1993), Successful Tax Reform. Lessons from an Analysis of Tax Reform in Six Countries, Perrymead, UK: Fiscal Publications

Smith, Julie P (1993), Taxing Popularity: The Story of Taxation in Australia, Canberra: Federalism Research Centre