Submission No. 12 Back to full list of submissions
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This letter was originally forwarded under the following logos – Law Institute of Victoria, National Tax & Accountants Association, National Institute of Accountants and Australian Taxpayers’ Association.

22 December 1998

Mr John Ralph, AO


Review of Business Taxation

Department of Treasury

Canberra. ACT. 2600

Dear Mr Ralph,

The undersigned organisations congratulate you on your appointment as Chairman of the Review of Business Taxation, and thank you for taking on a task which has such enormous potential benefits for this nation.

Many of the organisations signing this letter will no doubt make submissions to you on numerous aspects of the business tax reform proposals. The purpose of this letter is to respond to the Discussion Paper (referred to in this submission as the "Paper") entitled "A Strong Foundation", particularly in relation to one area which the undersigned bodies believe is of fundamental importance to business tax reform.

The Paper states (eg at page XV) that the Review proposes a reform strategy including (amongst other things) "... reform to the design processes for policy, legislation and administration". The undersigned bodies endorse that proposal since they believe that the processes of ongoing policymaking and drafting of legislation are of fundamental importance in the long term to ensure that the reformed business tax system continues to meet the objectives stated in the Paper. It is submitted also that the current system has demonstrably failed to meet those objectives. Some suggestions on possible methods of improving the process are set out in this letter.


This submission strongly endorses the aims expressed at paragraph 55 of the Overview in the Paper, and is intended to make the following major points.

  1. The submission strongly endorses the proposal for greater private sector involvement in development of policy at an early stage (eg paragraphs 57 to 62 of the Overview in the Paper). The Paper seems to contemplate consultation through the various stages of development of policy and legislation (eg paragraph 7.49) and this submission stresses the importance of such consultation.
  2. While recognising the Treasurer's overall responsibility and authority for initiation of tax policy, it is submitted that the system should allow for non-government bodies to initiate consideration of reform measures, as well as commenting on measures proposed from within the Executive Government.
  3. The submission strongly endorses the Paper's proposal to reduce retrospective legislation and in particular "legislation by press release". It is submitted that such actions are undemocratic, and should be regarded as an extreme form of emergency measure to be used only in the most drastic circumstances.
  4. The submission strongly endorses the proposed "integrated team" approach of tax design (cf paragraphs 7.35 to 7.53 of the Paper) as one means of improving accountability, submits that the "integrated" approach should be paralleled by opportunity for comprehensive public comment at all stages of the process, and makes suggestions to enhance that approach.
  5. The submission endorses the proposals for scrutiny of the process by a type of advisory board (cf paragraph 7.61 and following in the Paper). However, it is submitted that the system could be enhanced by a much broader range of such scrutiny whether by the advisory board or by other means eg a Board with wider supervisory powers over the Australian Taxation Office ("ATO").

It is noted that the Review is addressing only business taxation, and accordingly this submission concentrates on that area of the tax system. It should not be inferred, though, that those of the signatory bodies with an interest in the tax system generally would not strongly support the same propositions in relation to the tax system generally.

The rest of this paper discusses some of the current problems in the process of developing tax policy and legislation, and suggest elements of the solution to be developed in accordance with the above submissions.


So much tax legislation is so bad

The Paper proposes identifying a suggested design framework of national objectives and supporting principles as a foundation on which to build the reformed tax system. The objectives proposed are optimising economic growth, ensuring equity and facilitating simplification. It is submitted that the current taxation laws fail to meet those objectives.

The failure to meet the objective of simplification is perhaps the easiest to demonstrate. As was stated by Sir William Deane, in his former role as a Justice of the High Court, in Hepples v FCT (98 ATC 4808 at 4818-19):

"successive administrations have allowed the Act to become a legislative jungle" and "... the least that ... a taxpayer is entitled to demand of government is that ... a legislative intent to impose a tax upon him or her in respect of a commonplace transaction will be expressed in clear words".

The provisions at issue in Hepples have, in fact, been amended. Nevertheless, the underlying problem remains, as is evident from comments by Mr Justice Hill of the Federal Court (in Consolidated Press Holdings Limited v Federal Commissioner of Taxation 98 ATC 5009 at 5016) that the legislative context of the case before him was one which "many would describe as mind-numbing complexity".

The Paper notes (at paragraph 46 of the Overview) that compromises will sometimes have to be made where those objectives compete. It is submitted, though, that generally simplicity will be found to enhance, rather than derogate from, the other two objectives. Conversely, it is submitted that lack of simplicity will generally tend to derogate from, rather than enhance, the other two objectives. This letter does not seek to multiply examples, nor to demonstrate the detriments to the nation arising from complex and obscure tax legislation often not well grounded in commercial reality and imposing onerous compliance burdens. It is inferred from the Paper that those matters will be accepted as self-evident.

Bad tax legislation is caused by bad process

Bad process can start even before a tax initiative is announced, and can continue right through until legislation is enacted. An archetypal example is the replacement of section 26AAC of the Income Tax Assessment Act 1936 ("1936 Act"), concerning employee share plans, with the new Division 13A of Part III of the 1936 Act, dealing with the same subject matter.

Another striking example of bad process is the passage of Schedule 2F to the 1936 Act, the so-called "trust loss" provisions.

Details of those cases are set out Appendix A. In each of these cases, there was extensive delay in finalising the legislative changes, partly because of public comment and consultation after the original announcement had been made. In the circumstances, such public consultation was right and proper notwithstanding the delay it caused. The circumstances should not, however, have arisen. It is not inevitable that proper consultation should mean years of delay and uncertainty, as is shown by other cases - refer eg Appendix A.


In summary, a major factor in the bad process which produces bad legislation is that public consultation is not used effectively. Public consultation often comes too late after entrenched policy positions have been publicly announced, time frames for public consultation are often too short, and input from consultation is often not translated into better legislation.

1(a) Need for Consultation on Policy

All too frequently, announcements of tax changes are made on the basis of policy later recognised as being flawed or badly targeted. The employee share plan changes and the trust loss provisions are good examples of that problem. The usual consequences are lengthy and wasteful debates involving politicians, ATO and Treasury and the private sector, usually leading to inadequate compromises rather than fundamentally satisfactory decisions. Those consequences could be reduced if policy was finalised only after informed public debate.

Another problem is that the policy as announced is usually cast in the widest possible terms, rather than being directed specifically at the perceived problem. Once the policy has been announced, there is a tendency to see any clarification of what the perceived problem really is, and consequent confirmation of what falls outside the perceived problem, as being a "concession", and the legislative product of such clarification is usually restricted to a series of narrowly defined exemptions. (See eg the Second Reading Speech to Act No. 100 of 1991, concerning "concessional modifications" to the thin capitalisation rules.) The FBT legislation is a paradigm example. It is ridiculous that there has to be legislation to confirm that an employer is not liable to tax for permitting employees to go to the toilet (sections 47(3) and 47(4) of the Fringe Benefits Tax Assessment Act 1986).

  1. Suggestion

As noted, this submission strongly endorses the Paper's emphasis on early consultation including as to policy development. Before announcing a commencement date for an intended tax change, the responsible Minister should give relevant non-Government bodies the opportunity to comment on the background to the proposed change and the likely effects of the proposed change. The proposals in the Paper concerning the "forward work program" (eg paragraphs 7.16 to 7.19) are welcomed as a step in the right direction. The extent of consultation, and the identity of bodies consulted, should no doubt vary from case to case, though the presumption should be in favour of full public consultation. Without limiting the range of consultation regarded as desirable, it is submitted that Ministers responsible for taxation matters should have regular meetings with representatives of industry and professional bodies having taxation expertise, to discuss with those bodies the policy initiatives being considered by the Government, so that those bodies can help the Minister obtain appropriate non-Government input on the issues in question.

2(a) Sources of Policy Proposals

It is noted that the Paper proposes a more integrated approach to tax design, involving the establishment of integrated cross agency teams, with a steering committee providing clear lines of accountability. Noting that ultimate responsibility for business tax policy rests with the Treasurer, the paper proposes that a draft forward work program be prepared by the Government agencies for endorsement by the Treasurer. There is also to be greater consultation with external stakeholders (which it is presumed includes industry and professional bodies). All of these proposals are very much supported. It is considered that more effective consultation, at an earlier stage, will not only result in a better product, but will also create a degree of commitment and ownership on the part of the external stakeholders.

One major shortcoming in the recent past has been the inability of external stakeholders to initiate changes to the business tax system themselves. There have always been informal avenues through approaching the agencies or the Government directly, but the outcomes achieved from those approaches have been far from satisfactory. The feeling has been that the ATO and Treasury have a stranglehold over the policy and legislation process, leaving the externals with little real ability to influence matters.

  1. Suggestion

An improved process from the point of view of the external stakeholders would be an independent body which would consider proposals for change from external stakeholders and make recommendations to the Government both on those proposals and on proposals originally presented to Government by the agencies. Such a body would be comprised partly of tax specialists, other community representatives and some agency representatives. It would focus solely on commenting on recommendations for changes to the business tax system, and would therefore probably need to be a separate body from the advisory board which is also proposed in the Paper.

3(a) Problems with Retrospectivity

The Executive Government has made a practice of making public announcements of tax changes stated to be effective as from the date of the announcement. The practice is fundamentally undemocratic. It places Parliament in the invidious position of either surrendering to the wishes of the Executive Government, or adding to the environment of uncertainty in which taxpayers inevitably operate between the date of such an announcement and the date the relevant legislation is enacted. Of course there is also the more widely recognised problem that legislation often has consequences that could not have been inferred from the announcement (whether or not as a result of deliberate changes by Parliament or by the Government to the intended effect of the measures). It is understood that Government often wishes to enact a measure with effect from the date of an announcement, in order to close off perceived avenues for tax avoidance (cf paragraphs 7.22 and 7.23 of the Paper). General anti-avoidance provisions, properly drafted and properly administered, should preclude the need for such measures except in very rare cases. The Courts have shown a willingness to apply Part IVA of the 1936 Act in a robust and pragmatic way (cf Federal Commissioner of Taxation v Spotless Services Limited 96 ATC 5201). In any case, presumably the Government spends some time formulating its policy position before it "legislates by press release" against alleged tax avoidance, and announcing as soon as possible that such a policy consideration is going on would seem conducive to discouraging, rather than encouraging, the alleged tax avoidance practices.

  1. Suggestion - No retrospective legislation

Obligations should not be imposed on taxpayers retrospectively, whether by "legislation by press release" or otherwise. Newly announced policies should take effect only after proper public consultation as to the scope and nature of the proposed measures. There is a need for a mindset that exceptions to these principles will be rare and prompted by drastic conditions.

4(a) Entrenching of Policy Hampers Legislation

Sometimes it proves difficult to achieve a clarification which seems to make perfect sense. It is understandable that public servants responsible for drafting legislation are reluctant to second guess matters that they perceive to be Government policy (even though, strictly, the form of legislation is for Parliament, rather than for Government or public servants to decide). "Policy" in this context appears to be extremely wide. That reluctance can mean, therefore, that even comparatively minor changes to draft legislation will not be made by those responsible for drafting it. An example arose when the trust loss provisions were being enacted – see Appendix A.

(b) Suggestions – Integrated Approach and Public Transparency

The parties to this submission strongly endorse the proposed integrated team approach to tax design, under which refinement of policy would be a part of the full process of enacting legislation rather than policy being set in stone separately and beforehand. It is submitted that, in order for this integrated approach to be most effective, it is strongly desirable for public consultation to be continued throughout the design process, and for that consultation to provide, from beginning to end, opportunities for comment on policy, legislative drafting issues and administration. The benefits of such continuous and comprehensive public consultation would include the "tidying up" of minor policy issues which might only emerge on an examination of the details of legislative drafting.

It is suggested, further, that public consultation and accountability to the public would be enhanced by making the whole chain of accountability public. Each time a tax change is announced, there should be a public identification of the hierarchy of responsibility for legislative enactment of that legislation, right from the initial telephone contact officer through to the responsible Minister. This would ensure that, for example, where the ATO regard a matter as Treasury's responsibility, but Treasury regard it as a ATO responsibility, interested parties will be able to identify a person further up the line who may resolve the deadlock (or take responsibility for the issue). It would also ensure that when a matter is identified as being one of "policy", the matter can be referred up until it reaches a person who has authority to make a decision on that "policy" issue.

The proposal for use of discussion papers (paragraph 7.30 of the Paper) is welcomed, as are the Paper's other proposals for increased awareness. It is submitted that such public awareness could easily and constructively be made ongoing, by public release of appropriate papers during the integrated team's activities. It is understood that formal "drafting instructions" are not always given, or at least are not always captured on paper. Whatever drafting instructions (or broad equivalent) are created to enable policy to be turned into legislation should be made available to the public, or at least to relevant industry and professional bodies, to enable meaningful constructive input on matters of detail.

5. Other Matters concerning Consultation and Accountability

The Paper refers (for example at paragraph 7.11) to the desirable objective of improving "the levels of community trust and confidence in business tax processes, as well as their outcomes". As noted above, this submission endorses the proposals concerning an advisory board, which the Paper recognises as helping to meet that objective. It would appear from paragraphs 7.61 to 7.72 of the Paper that members of the Review have an open mind on the extent of the advisory board's powers. It is submitted that for the advisory board to have a genuinely beneficial impact on community trust and confidence, the advisory board must be seen to be effective in influencing the process. It is also submitted, strongly, that a similar approach should be adopted in relation to other areas of the business tax system.

It has been suggested, for example, that the ATO should be supervised by a Board (whether or not the same advisory board as is referred to in the Paper) to whom the Commissioner of Taxation would report in the same manner that a chief executive officer reports to the Board of a public company. It is submitted that the Review should seriously examine that option, particularly in the context of its proposed second phase, which it is understood will comprise a comparison of Australia's business tax system with those of a number of other countries (cf paragraph 4 of the Overview in the Paper).


From the taxpayer's point of view, the current legislative process is characterised by ambush and ambit claim, which is seldom mitigated satisfactorily by the subsequent "extensive consultation". An overhaul of the current business tax system will inevitably have only temporary success unless there is a corresponding overhaul of the process for legislative amendment of that system. The Review team is to be congratulated on its extensive examination of that issue.

The suggestions set out above are not intended as a comprehensive cure for the ills of the current system. The undersigned bodies will be observing and participating with interest in the further activities of the Review.

Please do not hesitate to contact Janine Hellard on (03) 9607 9379 if you would like to discuss these comments with the undersigned bodies or obtain further explanation.

Yours sincerely,




National Institute of Accountants



National Director

Australian Taxpayers’ Association





Law Institute of Victoria



Legal Counsel

National Tax & Accountant Institute




Employee Share Plans

On 10 May 1994, the then Government announced that, with immediate effect, benefits under employee share plans would no longer be subject to income tax under section 26AAC, but would be subject to fringe benefits tax ("FBT"). It was subsequently recognised that employee share plan benefits should be dealt with under the income tax system rather than the FBT system. Therefore, on 28 March 1995, it was announced that employee share plan benefits (including those granted on or after 10 May 1994) would be dealt with under the income tax system and not the FBT system. Complex transitional measures were announced, but those measures could not, of course, mitigate the damage done to employers and employees who had entered into arrangements between 10 May 1994 and 28 March 1995 on the assumption that the relevant benefits would be covered by the FBT system. Legislation was introduced into Parliament, and after substantial amendments, was enacted on 16 December 1995. The legislation was so deficient that, without there being any change in policy, further amendments were required, the last of which was enacted on 14 October 1997. By that time, of course, it had been announced that the entire 1936 Act would be re-written under the auspices of the Tax Law Improvement Project – that is, Division 13A was effectively redundant before it was correctly legislated, more than three and a half years after it was announced that section 26AAC was to be replaced.

Trust Losses

On 9 May 1995, the then Treasurer announced that, with immediate effect, there would be substantial restrictions on the capacity of trusts to claim deductions for tax losses incurred in previous years. The 1936 Act had been in force for some 59 years. No explanation was given for the sudden urgency of the issue. Draft legislation was introduced, and after extensive public criticism (and a change of Government) that legislation was abandoned and completely new legislation was introduced. The legislation, as ultimately amended, was finally enacted on 23 March 1998. Notwithstanding the delay, successive Governments clung tenaciously to the 9 May 1995 starting date (on the pretext that complex "transitional" provisions dealt adequately with the nearly three years of delay).

Some of the more onerous and punitive aspects of the trust loss provisions do not apply to a "family trust" as defined (and nor do some of the more onerous and punitive aspects of the more recent franking credit trading legislation). A "family trust" is a trust which has made a family trust election. Such an election involves, amongst other things, the nominating of a person ("primary individual") by reference to whom the concept "family" is defined. As presently drafted, the definition of "family" includes, amongst other things, that individual's grandchildren but not his or her great-grandchildren. Accordingly, distributions of income to such great-grandchildren will be subject to penalty tax ("family trust distribution tax") at the rate of 48.5%. This is notwithstanding that a family trust election for a non-fixed trust is irrevocable, and that trusts can exist for up to 80 years (if not longer in some jurisdictions). Well before that time, great-grandchildren may well become legitimate potential beneficiaries. The ATO believed that the exclusion of great-grandchildren from the definition of "family" was a Government decision from which they could not depart in drafting legislation for Parliament to consider (ATO evidence to the Senate – Economics Legislation Committee, page E181 of the report of proceedings on 13 November 1997).


Each of those cases might be said to be inherently controversial, perhaps because of their anti-avoidance origins. However, even matters which should be uncontroversial can fall victim to bad process. For example, the Tax Law Improvement Bill (number 2) 1997 included a re-write of the capital gains tax provisions. Given that the re-write was intended to make no substantive changes to the effect of the capital gains tax laws, it should have been a mere drafting exercise. Nevertheless, after the Bill was introduced into Parliament, it proved necessary for 283 amendments, comprising some 140 pages of legislation, to be introduced.

Franking Credit Trading

In the 13 May 1997 Budget speech the Treasurer announced a number of measures designed to prevent "franking credit trading" and "dividend streaming". Those measures were, in general, announced to have immediate effect. The combination of retrospectivity and preconceived policy did have adverse effects, particularly in the securities markets in the immediate aftermath of the announcements, but those problems were mitigated through subsequent attention to public comment. For example, it was recognised that there were flaws in the proposal to deny franking credits on dividends from shares not held "at risk" for a sufficient period (the so-called "45 day rule"). Specifically, if applied simplistically as originally announced, the proposal would penalise a tax payer for eg hedging even where the taxpayer had good commercial reasons, or even fiduciary duties, to minimise the risks inherent in holding shares (eg funds managers and superannuation fund trustees). As a consequence, on 8 August 1997, it was announced that the investors of that type would not be subject to the "45 day rule" as long as their risk management strategies fell within certain criteria intended to reflect commercial reality. Also, the commencement of the "45 day rule" was deferred until 1 July 1997. Those changes, amongst other constructive changes announced at that time, were reflected in draft legislation released on 31 December 1997, which ultimately appeared on 2 July 1998 in Taxation Laws Amendment Bill (No 5) 1998 – ie after several months during which interested parties could scrutinise the draft and make submissions. Although the process was still less than ideal, largely because of the manner in which it was first announced, the end product was substantially better than was first feared, as a result of the efforts made to accommodate genuine public concerns.