Level 2
95 Pitt Street Sydney, NSW 2000
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Email tia@taxinstitute.com.au
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ABN 45 008 392 372
3 April 2008
Mr Neil Wilson
The Chair
Tax Design Review Panel
The Treasury
Langton Crescent
Parkes ACT 2600
Email: taxdesignreview@treasury.gov.au
Dear Mr Wilson,
Tax Design Review Panel – Consultation Paper
The Taxation Institute of Australia (Taxation Institute) welcomes the opportunity to contribute to the
development of processes and procedures targeted at reducing delays in the enactment of tax
legislation and the improvement of the quality of the tax law changes. We also wish to thank the
Panel for providing representatives of the Taxation Institute with the opportunity to participate in a
briefing on the project on 5 March 2008.
The Taxation Institute has had a long term commitment to ensuring that Australia’s taxation laws
meet the essential criteria of efficiency, equity and simplicity. For example, on 22 June 2006 the
Taxation Institute released a significant, independent report by Professor C. John Taylor, "Beyond
a
4100", which made a number significant recommendations for improved, t rgeted reform that if
adopted would further simplify our tax laws and reduce the current crippling spiral of compliance
costs.
Given our 65 year commitment to law improvement the Taxation Institute is pleased to provide the
following comments on the Consultative Paper released by the Tax Design Review Panel. In
making these comments we address the terms of reference through the specific focusing
questions. We apologise for the delay in submitting these comments.
The Terms of Reference
Term 1: Options to reduce the delay between the announcement of proposed changes to
tax laws and the introduction into Parliament of associated tax legislation.
Before addressing the focusing questions it is important to stress that the two key drivers of the
delays in enactment legislation are the perceived lack of drafting resources coupled with poor
project management whereby projects appear to be abandoned, even where approaching
competition due to a new Governmental priority, rather than being finalised alongside the new
priority projects. These two themes will be further explored in the following.
A further preliminary point is that although a responsive legislative outcome is important it should
not be achieved at the detriment to the delivery of clear and concise law and the essential tool in
delivering this outcome, consultation.
Question 1.1: What is a reasonable timeframe for the introduction of legislation following an
announced tax change?
Given limited Parliamentary time and the need for Governments to restore certainty (eg to counter
perceived avoidance or to reverse an adverse judicial decision) there is an acceptance that there
will be announcements followed by subsequent legislation. The acceptable time period between
announcement and introduction may ultimately depend upon the nature of the tax law change
being contemplated. There are four broad categories for classifying tax law changes being:
• measures to stop an abuse of the legislation;
• minor technical corrections/policy changes;
• remedial and more significant changes to existing legislation (eg response to the McNeil
case, extending the available fraction beyond three decimal places and the 1 December
2005, the 2006 and 2007 consolidation announcements); and
• the large “P” tax redesign/reform changes (eg the capital allowance regime, TOFA, and the
review of the taxation of managed investment trusts).
In the first category (ie measures to stop an abuse of the legislation) it is accepted that the
Government should make an announcement as soon as possible that from that moment forward
the identified abuse will be overcome. Such an announcement should be clear on the abuse being
dealt with but does not need to be detailed on how the abuse will be overcome. This approach
should be limited to cases of significant abuse where the outcomes taxpayers are achieving are
clearly contrary to policy.
However, this should not be the case with legislation that will increase tax payable but cannot be
said to be remedying a significant abuse and cannot be said to be eliminating something clearly
contrary to policy (eg the previous Government's announced changes, just before the election, to
the consolidation tax cost setting rules when an entity joins a consolidated group or multiple entry
consolidated group following a CGT roll-over affecting the membership interests of the joining
entity). In such situations it is not clear whether the outcomes are contrary to policy and it is not
clear exactly what outcomes should be averted. In these situations there needs to be consultation
on the principles and new policy before a start date is set.
With the second and third categories there should be limited time between announcement and
enactment. Ideally some of these minor technical corrections could have accompanying legislation
introduced on announcement, provided adequate consultation and law development has taken
place. The travel between two places of work changes is an example of a simple measure being
poorly designed and drafted as no consultation was sought.
Where the measures are aimed at remedying flaws in the legislation, responses to judicial
decisions and taxpayer relief an announcement should be made as soon as there is a decision to
take action. In these circumstances the new rules would be effective from the date of the
announcement. This allows transactions to proceed rather than fall over and allows companies to
calculate their tax expense on the new basis. In these circumstances, taxpayers are happy to have
an announcement that clearly identifies the outcomes of the new rules without having details of
exactly how the legislation will work. In practice this needs to be limited to situations where the new
outcomes can be clearly defined. It requires the announcement to clearly express those outcomes.
A maximum time period for such legislation should be six months.
However, it is rarely the case that an announcement will clearly identify the outcomes of the new
rules. In these cases, particularly if the legislative solution is likely to be held up, there is a need for
a process whereby the announcement is clarified.
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The fourth category of announcements (larger policy reforms) will, by their nature, have more
extended periods of development. In complicated situations like this it is appropriate for there to be
detailed analysis and extensive consultation to form the principles and the design of the new law.
The start date in situations like these should be deferred until significant development work has
been done. However, this process needs to be monitored to avoid long term delays. As part of this
process any major tax reform policy announcement, if not enacted within 12 months, should be
reviewed to see whether any change remains necessary. There are announcement policy changes
currently in this category (relating to Review of Business Taxation recommendations) that are yet
to be enacted but remain on a list despite both the current commercial environment and existing
legal structures rendering the changes otiose.
In summary, the general principle with announcements is that they need to clearly identify
outcomes but leave flexibility on exactly how those outcomes will be achieved. Sometimes it will be
appropriate to leave significant principles open to consultation. An example would be the changes
to section 98 to extend it to non-resident trustees. The announcement said that there would be a
new creditable withholding tax where the Australian trust is a managed investment scheme. There
was a reasonable debate to be had as to whether a non-creditable tax would be better than a
creditable tax but the announcement did not leave room for this debate.
Question 1.2.1: From experience, what have been the causes of delays in tax design
processes?
Delays in the tax design process seem to have a number of root causes. Many delays are
attributable to a lack of resources at both the legislative drafting level within the Office of
Parliamentary Council (OPC) or at the instructing officer level within the Treasury. Within Treasury
a small number of experienced officers are often saddled with project leadership of a number of
key reforms simultaneously, resulting in limited or no action on the relative less pressing issues.
Often the limited drafting resources available for taxation related measures are further depleted by
resources being subject to re-deployment on strategic non-taxation related measures (eg the work
choice changes by the former Government). This redeployment means projects nearly complete
are suspended and when reactivated, often resources are wasted as new project leaders,
instructing officers and parliamentary drafters re-familiarise themselves with the policy nuances
before being in a position to restart the project. This means significant effort and resources are
effectively wasted and extensive time lags result.
An adherence to aged policy announcement coupled with “over-engineering” (ie the pursuit of an
obsession “with building a perfect economic model”) of policy responses further delays legislative
development. Current examples are the TOFA foreign exchange measures as well as the current
TOFA measures. Further a preoccupation with the “time value of money” has resulted in the
bringing forward of revenue collection which outstrips the ability of taxpayers to supply the
supporting information in a cost effective manner. This combined with the pre-occupation of
policies focused on “taxing the last dollar” imposes higher taxpayer compliance costs on the whole
taxpaying community. Legislation needs again to become more targeted.
There is also a perception that there is an underlying lack of ownership/accountability for
announced measures (particularly tax neutral or concessional measures). This can exist at the
instructing officer level and at the drafting level. Without the appropriate ownership there is a
perception that timeframes can be stretched without there being accountability for that delay.
This ownership/accountability divide is further compounded by the fact that both key personnel are
engaged by different agencies where the tax policy development is the responsibility of Treasury,
the drafting of OPC. There is a perception that because of these divided responsibilities the
progress of a legislative matter may be delayed due to a disagreement between the drafter and the
instructing officer. This often arises in the consultation context where the external members
uniformly question the wording of legislation and the drafter refuses to budge. There does not
appear to be a process where the drafters to face their critics and justify their stance. Other than
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the instructing officer conceding the point as OPC has responsibility for drafting there is does not
appear to be a mechanism for resolving the impasse in the “national interest”.
Finally, there is a perception that delays appear to have increased since 2002 when the Treasury
adopted the approach that all announcements were to operate prospectively.
Question 1.2.2: How could these issues be addressed?
Again the response may depend on the policy change required as different models for developing
tax legislation are appropriate in different circumstances.
The lack of drafting resource issue could be addressed by increasing the OPC resources in
relation to the drafting of tax legislation, possibly including the development of a tax specialist
team. Outside of a direct resource injection alternative options could include the use of external
drafters and the utilisation of external drafts submitted during the consultation process. Another
suggestion to build capacity (and also insulate against Governmental policy shifts) would be to
establish a drafting team in Treasury (as has been done in New Zealand and Canada). This is not
alien to the Australian experience as illustrated by the existence of the Office of Legislative Drafting
(OLD) in the Attorney General’s Department. The OLD, which carries out the specialist functions of
drafting regulation is an example of how a separate drafting division located outside OPC can co-
existing and carry on complementary activities.
The perceived lack of instructing officer resources within Treasury issue could be ameliorated by
establishing a secondment/placement process where by ATO and private sector employees with
the relevant experience are seconded to Treasury for fixed terms. To facilitate interest within the
ATO a performance or promotion requirement that an individual has tax policy experience could be
introduced. Accounting and legal firms would be invited to recommend suitable staff as such
experience would provide an often missing tax policy understanding, crucial in rendering advice. In
particularly complex or specialist areas, use should be made of external expertise (either on a
formal or informal basis) to actively assist the policy formation process.
To counter the delays associated with redeployment of staff arising from changed Governmental
priorities, the Government should authorise policy work to be continued on projects identified to the
Government as close to completion. An incentive that would ensure Governmental commitment
could be in appropriate circumstances to make announcements that are a cost to the revenue
operative from the day of announcement and measures that benefit the revenue operative from the
date of Royal Assent or the income year following Royal Assent.
Further, crucial to ensuring timely legislation is accountability and ownership by both the instructing
team and the drafters. This fact was identified in A Tax System Redesigned (at pp 95-6) where the
Review of Business Taxation noted that "there must be a shared sense of ownership of the issues
[and] clear accountabilities”. To ensure ownership the responsible Treasury team leaders (the
project managers) should be identified with the project publically (eg on both the Treasury website
and in the press release). Associated with this accountability is the role of OPC. As drafter of the
legislation OPC drafters should be held jointly accountable for any drafting delays and for the
quality of the legislation. Drafters should be known and identified with their work.
If respect of the delays due to divided responsibilities, the drafter should participate in the final
stages of the consultation. This minor resource cost would allow for issues of structure and
language to be resolved, thereby limiting such delays. If a stalemate still remains then there should
be an option for a third party from Treasury or OPC to step to ensure that the legislation can be
progressed.
Finally, given the number of aged announcements, there is the need for the creation of a specialist
group with on-going responsibility for “cleaning up” old provisions, with the ability to suggest “small
p” policy changes if there are opportunities for significant legislative simplification. Although this
was a recommendation of the Board of Taxation there has been little movement of this issue.
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Question 1.3: What are the practical consequences for the community of delays between
the announcement of tax law changes and the introduction of legislation?
The major practical consequences for the community arising from delays between the
announcement of tax law changes and the introduction of legislation is a lack of certainty. This lack
of certainty can result in deals not being done or foreign investors choosing other jurisdictions with
more legal certainty as their place for investment.
Question 1.4: What are the sorts of tax changes where delays may be of lesser concern?
As mentioned above in Question 1.1, the area of least concern on timing are major policy
announcements, which by their nature, have more extended periods of development. However,
this process needs to be monitored to avert long term delays, with any major tax reform policy
announcement, if not enacted within 12 months, being reviewed.
Question 1.5: What circumstances justify a proposed law change taking effect before
enactment of the legislation?
As mentioned above in Question 1.1, a proposed law change taking effect before enactment
should occur where it is:
• of benefit to Australians in need;
• necessary to restore the original policy intent following an adverse Court decision or
identified tax abuse; or
• necessary to reverse fundamental design defects in the original legislation arising from a
major project (eg a number of the consolidation changes).
Only in very limited cases should proposed laws have a retrospective effect prior to
announcement.
Term of Reference 2: How the quality of the law can be improved through enhanced
community consultation, particularly in the development of tax policy changes prior to the
announcement of specific changes?
Question 2.1: Is there value in consulting on options to address an issue prior to the
government taking a decision on actually making a change? If so, why?
Again the response may depend on the policy change required as different models for developing
tax legislation are appropriate in different circumstances. However, as a starting proposition, there
is value in consulting on options to address an issue prior to the Government taking a decision on
actually making a change. By helping to design a high level policy response, it may be possible to
avoid the Government being tied to a specific policy which will result in unacceptable additional
compliance costs or damage an industry or market unnecessarily. Pre-policy formation
consultation may allow for the development of an alternative approach which also meets the policy
objectives without imposing such high level compliance costs or damaging markets.
Classic examples of this poor design in tackling problems which could have been ameliorated by
consultation are the trust loss provisions and the ultimate beneficiary (UB) disclosure
requirements. The then Government, in attacking issues arising from abuse of loss trusts,
introduced in 1998 provisions to counter that abuse in Schedule 2F of the Income Tax Assessment
Act 1936 (the 1936 Act). As well as introducing a definition of fixed trust that arguably means no
trust is fixed (ie they do not have fixed entitlements under Division 272) they also introduced a
narrow exemption from the trust loss provisions for certain family trusts (the family trust elections
(FTEs) rules). This exemption was extremely narrow. Although there were some subsequent
changes to the operation of the FTE provisions that have alleviated lodgment difficulties being
experienced by taxpayers there are still a number of instances where the FTE provisions operate
inequitably and impact badly on affected families. As the trust loss issues would be countered by
Part IVA of the 1936 Act, the policy approach involving the trust loss provisions and FTEs remains
ill conceived.
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Another problem is that Governments become wedded to the policy solution advanced and rarely
admit their mistake and advance an alternative solution. The UB disclosure requirements are also
an example of this problem. The UB disclosure requirements impose tax on the trustee of a trust
where a distribution is made to another trust and the ultimate beneficiary is not disclosed in a form
(statement) lodged with the trust return. The UB measures were aimed at countering crude
avoidance measures involving chains of trusts and round robin distributions. Instead of imposing a
draconian compliance burden on complying trusts (particularly unit trusts), the UB measures
should have been an access notice provision, where failure to comply results in 48.5% being levied
on the distribution. Integrity would have been maintained and compliance cost only arises in audit
situations of those persons seeking to avoid the law. Although the measures have now been
replaced, the then Government was reluctant to admit its mistake and adopt a new solution.
Instead it adopted a one tier reporting process in the new trustee beneficiary rules. As a result,
compliance remains for all trusts, in particular with a new requirement to separately indentify a tax
preferred amount being imposed. By involving external parties in such policy formation problems
such as these can be limited.
Thus, in cases where there is early announcement (in particular in respect of the policy changes
encompassed by categories one to three), pre-consultation through oversight committee or expert
committee (including Treasury, Taxation Office and industry practitioners) should be utilised. This
consultation could in some instances involve one paid private sector consultant, in other situations
a panel of experts. There should not be a “one size fits all” approach to consultation. Rather
different industry consultation models should be available.
Even in the case of large scale reform projects, consultation should be done through more
extensive use of discussion papers on potential areas of policy change prior to their
announcement. This would allow for the detailed analysis and detailed consultation necessary to
form the principles and the design of the new law and overcoming the lock-in problem.
Question 2.2: Can participants in consultation be expected to provide views in the national
interest rather than views representing private interests?
As over 95% of current consultation is undertaken when the policy parameters are already preset,
the “national interest” is rarely in issue as the focus is on arguing about the words rather than the
policy approach. However, most practitioners engaged in the limited consultation models currently
adopted will be clear about their vested interest in these discussions but will acknowledge and
work towards the “national interest”. This includes criticising the locked-in policy where it is ill
conceived. Further the ATO has sought to use paid consultants on its various Rulings Panels and
the issue of self interest does not appear to have been raised. Therefore we believe practitioners
can consult, providing views consistent with advancing good tax policy design which enhances the
national interest.
Question 2.3: How can consultation on tax changes be undertaken more efficiently or in a
way that contributes to shorter overall timeframes?
The key to speeding up effective consultation is open communication around the legislative
program. Under the former Government and under the current Government there is no
transparency of the legislative time table and the relative importance of measures. This means that
consultation becomes ad-hoc and disjointed as external parties are unable to plan for consultation
nor indicate periods where cyclical work priorities limit the capacity to consult.
Question 2.4: How can the effectiveness, or quality, of consultation processes be
improved?
Crucial to improving the effectiveness and quality of consultation processes is having a clear
legislative timetable and an understanding of private sector capacities. Often inadequate warning
and time for consultation appears to be the “norm” in the early months of the year. Examples of
where inadequate time periods were given include the consultation in respect of:
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• the 56 pages of venture capital draft legislation where 24 hours were given for consultation;
• the draft legislation on the Taxation of Trustees in relation to non-resident trustee
beneficiaries (four working days);
• further draft legislation on the non final tax on managed fund distributions to non-residents
measures, where the draft was released Friday 16 February 2007 at 4.09 pm with a
submission due on 21 February;
• the removal of foreign loss and foreign tax credit quarantining proposals and ultimate
beneficiary statements changes in May 2007 where less than a week was given for
consultation;
• the public Exposure drafts in respect of the TOFA interactions and consequential
amendments, which were released in May 2007 with only 7 working days for consultation;
• the proposed TOFA Synthetic Rules, also released in May 2007, with six working days for
consultation; and
• a new draft of the notional CFC legislation in respect of the removal of foreign loss and
foreign tax credit quarantining proposals released in May 2007 with one working day for
consultation.
This is a long term problem. For example on 22 November 2004 an invitation was issue in respect of
participation in a ‘round-table’ meeting on 24 November 2004 to discuss the development of certain
superannuation regulations. It allowed less than two days for the Taxation Institute to identify and
nominate an appropriately qualified representative with the time to spend a half a day out of the
office in attending and adding value to this consultation process. Similar problems occurred with the
company loss recoupment rules. Consulting on the legislative process commenced with the issue of
a Treasury discussion paper in April 2004. Exposure draft legislation was subsequently released in
February 2005. Following receipt of submissions on the exposure draft in April 2005 a meeting was
held with key stakeholders in May 2005. However notice for this meeting was three working days
and it was scheduled on budget eve. A subsequent 27 July 2005 meeting had four working days
notice.
These are a mere sample of the instances where inadequate project management impacted upon
the effectiveness of consultation and the quality of resultant legislation.
On the quality side there is also a need to incorporate additional time into legislative development
timetables for the “road testing” phase (and the possibility of “rework” of draft legislation).
Term of Reference 3: What methods will increase community input into the prioritisation of
changes to tax laws?
Question 3.1: What role can the business and tax community play in assisting with
prioritising the order in which tax issues are addressed? What criteria should be used when
prioritising tax changes?
It is difficult for business and the tax community to play a consensus role in ranking the order in
which tax issues are addressed as to each sector of the community, the laws that impact upon
them will be the most important. The solution probably lies in weighing a number of some times
competing factors. They could include the:
• level of inequity of the existing or modified rule on the community or a sector;
• impact upon the community in respect of uncertainty;
• level of compliance costs;
• the cost of the measure;
• number of taxpayers affected; and
• age of the issue (eg a minor issue requiring remedial attention that has existed for many
years).
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In summary, Taxation Institute believes that the law design processes and procedures can be
streamlined through the range of solutions discussed above to reduce the delays in the enactment
of tax legislation without adversely impacting upon and rather in all likelihood increasing the quality
of the tax law changes. If you have any queries in relation to the issues raised in our submission,
please contact the Taxation Institute’s Senior Tax Counsel, Dr Michael Dirkis, on (02) 8223 0011.
Yours faithfully
Sue Williamson
President
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