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Speeches due 1 March 2002

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Speeches due 1 March 2002 Powered By Docstoc
					          STATE AND TERRITORY REVENUE COMMISSIONERS

                             ANNUAL CONFERENCE

                        HYATT COOLUM, QUEENSAND

                                 11 – 13 March 2002

Session 2: Consultation on Taxation Legislation and Implementation

           The Board of Taxation Perspective: Mr Brett Heading
                                              Member, Board of Taxation
                                              Partner, McCullough Robertson



Thank you Mr Chairman.

Good morning everybody. I would like to thank James Green for inviting me to
speak to you today.

I am very pleased to be able to speak to you today about consultation on taxation
legislation and implementation.

The topic for this morning’s session is particularly apposite in light of Government’s
establishment of the Board of Taxation, and even more so having regard to the
Board’s current review of the Commonwealth Government’s consultation
arrangements on taxation.

The Board's creation basically emerged out of a concern that the voice of business
was not being effectively heard or countenanced by Government and its advisers in
the development of taxation laws.

The common perception is that all too often tax laws are proposed or enacted that fail
to reflect the realities of commercial practice or the circumstances of individuals,
impose unnecessary compliance burdens, have unintended consequences, or that,
perhaps, the final legislation is not consistent with the actual policy intent.

Similarly, the perception is that problems in the general operation and functioning of
the tax system, which might emerge, for example, as a result of underlying global,
industrial, and environmental trends, are not always appreciated early enough by
Government and its advisers.

Some of you may be aware that the Board is currently undertaking an examination of
the Commonwealth Government’s approach to community consultation in the
development of taxation legislation. In essence, the Board is considering the sorts of
perceptions I have just mentioned, and what the Government might do to address
them.
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I would therefore like to take this opportunity to update you on the Board’s work on
consultation arrangements.

However, as I have mentioned, the Board itself is an integral part of the
Government’s consultation arrangements.

I therefore propose to begin by spending some time on what the Board is, and how it
came to be established.

I am sure that most of you here will have some knowledge of the Board and its role in
community consultation on Commonwealth taxation matters.

I hope that it will be possible for me also to update you on the Board’s work on the
Tax Value Method for calculating income tax, and to use this as a case study to
demonstrate the Board’s own approach to consultations.

Origins and Membership of the Board
The Board has its genesis in the recommendations of the Ralph Review of Business
Taxation.

The Review noted that business taxpayers were dissatisfied and frustrated with the
tax policy development process. These concerns were exacerbated by the ineffective
and inadequate consultations that had taken place in the development of business tax
policy.

I will return to these concerns shortly.

The Review therefore proposed the establishment of an advisory taxation board to
provide a formal opportunity for the private sector to consult with the Government
agencies responsible for the development of business tax policy and legislation.

In establishing the Board, the Government has broadly accepted the Ralph Review’s
recommendation. I should mention though that the Board’s charter from the
Government allows it to take a broad whole-of-tax system view, rather than a narrow
business tax focus.

The Board’s membership includes seven members drawn from the private sector. In
addition to myself, the private sector members are:

•    Dick Warburton, its chairman (Chairman, David Janes Limited);

•    John Bronger (National President of the Pharmacy Guild of Australia);

•    Tony D’Aloisio (Chief Executive Partner, Malleson Stephen Jaques);

•    John Harvey (Former CEO of PricewaterhouseCoopers);

•    Chris Jordan (Taxation Partner at KPMG); and
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•    Alison McClelland (Associate Professor in Social Policy at Latrobe University).

The members of the Board were chosen for their collective ability personally to
contribute knowledge and experience across a broad range of relevant business,
practitioner and broader community interests to the development of the tax system.

Also on the Board, as ex-officio members, are the heads of the three key Government
agencies responsible for tax policy, tax administration and legislation – the Secretary
of the Treasury, Ken Henry; the Commissioner of Taxation, Michael Carmody; and
the First Parliamentary Counsel, Hilary Penfold.

Their participation in Board meetings provides an opportunity for the Board to hear
the agency’s perspective on issues. It also provides an opportunity for the private
sector members to put their point of view at the highest level within the Treasury, the
ATO and the Office of Parliamentary Counsel.

I should also mention that the Board is supported by a small secretariat based in the
Commonwealth Treasury – a team of 4 comprising 3 Treasury personnel (including
the Secretary to the Board) and a secondee from the ATO.

After these running costs, the Board has discretionary spending of around $1.5
million per year available to it. The Board’s resourcing strategy is to keep its running
costs small and to “hire in” expert private sector advice on a needs basis.

The Role and Objectives of the Board
The Board’s mission, as stated in its Charter, is to:

     “…contribute a business and broader community perspective to improving the
     design of taxation laws and their operation.”

Ultimately, the Board is here to contribute, in the broadest possible terms, to better
tax system outcomes, by facilitating more effective community input into the
development and implementation of tax laws.

In pursuing this mission, the Charter reminds that the Board must have regard to the
fact that the Government is responsible for determining taxation policy and that the
Commissioner of Taxation has statutory responsibilities for administering Australia’s
tax laws.

It is very important to recognise that the Board is purely an advisory body to the
Treasurer. It has no mandate to determine, or indeed to lead public debate on,
taxation policy matters unless otherwise authorised by the Treasurer. Nor, obviously,
does the Board have any authority to inquire into or advise on the affairs of individual
taxpayers or other matters that would conflict with the statutory role and
responsibilities of the Commissioner of Taxation.
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Within those strictures, nevertheless, the Board has a potentially very wide ambit in
terms of issues it can address.

In particular, the Board’s key functions, as set out in its Charter, are to advise the
Treasurer on:

•    the quality and effectiveness of tax legislation and the processes for its
     development, including the processes of community consultation and other
     aspects of tax design;

•    improvements to the general integrity and functioning of the taxation system;

•    research and other studies commissioned by the Board on topics approved or
     referred by the Treasurer; and

•    other taxation matters referred to the Board by the Treasurer.

Consultation on Tax Policy and Legislation
The first of the Board’s functions specified in its Charter is to advise the Treasurer on
the “quality and effectiveness of tax legislation and the processes for its development,
including the processes of community consultation and other aspects of tax design.”

This brings me directly to the key topic of this morning’s session, consultation on tax
matters.

In conjunction with its Mission Statement, this function should be interpreted as
giving the Board two key roles:

•    First, to facilitate, once a policy direction or intent has been determined by the
     Government, full and effective community consultation and other relevant input
     to the ensuing processes of legislative development and implementation; and

•    Second, to facilitate and/or undertake evaluation of the “quality and
     effectiveness” of the resulting legislative product and implementation
     procedures, etc.

The objective, of course, is to achieve better legislative and implementation
outcomes, including in terms of those outcomes:

•    correctly reflecting the policy intent;

•    being compatible with commercial realities and the circumstances of
     individuals;

•    minimising complexities and resulting compliance costs; and

•    avoiding unintended consequences.
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The Government’s Approach to Community Consultations
In performing its role of facilitating community consultation in tax design and
implementation, it is important to recognise that the Board itself generally will not be
engaging in such consultation. Rather, the Board’s main purpose in this area is to
provide advice to the Government on processes and procedures needed to facilitate
the full and effective input of all legitimate community interests in an issue.

Having regard to this function, the Board is examining the Government’s approach to
consultation with the community on the development of tax legislation.

The Board is looking for strategies to improve the way in which the community
participates in the development of tax policy and legislation. The expectation is that
this will result in better informed tax policy and legislation decisions by Government,
and better outcomes for all concerned with the tax system.

It would not be appropriate for me now to foreshadow the Board’s report. The Board
will be making its report to the Treasurer, and hopefully the Treasurer will in due
course release the report.

However, there are a few general observations that I can make about the Board’s
work on consultation arrangements.

Consultation involves bringing together people with different interests, perspectives
and knowledge on a topic of mutual interest. The aim is to generate an effective
solution to an issue to the mutual gain of all concerned.

The Board has engaged in extensive consultations as a key element of its work on
consultation arrangements. Its aim has been to identify community concerns with the
existing consultation arrangements before going on to devise potential solutions.

Our objective has been to devise “best practice” community consultation processes,
while at the same time recognising the range of circumstances in which tax law can
be developed.

The Board commissioned KPMG to report to it on the level of satisfaction with the
existing consultation arrangements and means for improving upon those
arrangements.

KPMG's report to the Board draws on a variety of sources. These include an
extensive survey of Government and community stakeholders, a study of consultation
arrangements on tax legislation undertaken in comparable countries, and comparisons
with consultations undertaken for non-tax legislation in Australia.

A key component involved interviews and focus groups with Government officials,
Ministerial and Opposition staffers, business and peak organisations, welfare and
community groups, senior tax practitioners and academics and tax practitioner
representatives.
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In addition, a survey was sent to over 600 potential respondents. The general public
were able to participate in the survey through the Board's website.

It is clear to the Board that all stakeholders to the taxation system consider genuine
consultation to have an important role in the development of effective tax policy and
the design of any resulting legislation.

Consultation on policy and legislation can also generate more widespread acceptance
and understanding of the proposal.

It can have an educative role in the implementation process.

It is also clear to the Board that there are a range of concerns about the existing
consultation processes.

Let me take a few moments now to briefly mention some of these.

Lack of project management
There is sometimes the appearance of a lack of project management surrounding the
policy development and legislative processes. Setting unrealistic timeframes and
demands on those participating in the consultations exacerbates concerns in this area.
There may also be the appearance of a lack of accountability surrounding who has
responsibility for advancing a particular project, with insufficient resources and
inexperienced personnel being applied to them.

Consultations not ‘genuine’

The often short time frames, and the manner in which the consultations are
undertaken, can sometimes establish perceptions that the consultations are not
‘genuine’, and that the Government’s position is already firmly entrenched. This
leads to a lack of goodwill in the consultation process.

Consultations too late

Consultations may occur late in the policy and legislative development processes. As
a result, the focus of the consultation may turn to how to improve poor policy, or to
implement poor policy, rather than to design a good policy in the first place.

Unclear policy intent

The objectives or intent of tax reform initiatives are not always clear to those being
consulted. It can be difficult for the private sector to provide input when the problem
and proposed solution are not adequately explained.

Inappropriate role for the ATO

Finally, there is a widespread feeling within sections of the community that it is
inappropriate for the ATO to be responsible for both legislative design and
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administration. This is said to result in legislation that is too compliance driven,
sometimes at the expense of effective policy implementation, with unreasonable
compliance costs for taxpayers.

I should also emphasise that the Board has also received a very strong and
encouraging message that there has been a significant improvement in the quality of
consultations undertaken recently.

In establishing the Board, the Government has demonstrated that it has the goodwill
to engage in genuine consultations.

The Board hopes that its report to the Treasurer on consultation arrangements will
help lead the way on how this might best be achieved.

Indeed, the focus given by the Board to the need to improve consultation
arrangements may already be producing dividends. The recently released
consolidations package has included ample explanatory material and further
opportunities for public input. This process represents a significant improvement
over past practices.

That said, the Board and the broader community must acknowledge that frequently
the Government will have to balance community consultations against the need to
retain flexibility in managing issues, and its timing and resource needs.

At the end of the day, there will always be a need to exercise some judgement in
deciding on what amounts to adequate consultations in particular circumstances.

Tax Value Method
While the Board’s principal focus in promoting good community consultations is on
ensuring the right processes are established and adhered to by the relevant
Government agency, there will be occasions when the Board will itself seek to
consult with relevant interest groups.

In this context, it would be remiss of me not to mention the Board’s work on the Tax
Value Method, and the consultation process the Board has employed to advance its
consideration of the TVM.

The Treasurer announced, in the context of establishing the Board in August 2000,
that the Board would be asked to oversight a further process of community
consultation to develop and evaluate the TVM concept.

I should emphasise that, while the Ralph Review recommended that the TVM be
introduced, the Government has not yet made any decision on whether or not to do
so. The Treasurer’s reference of the TVM to the Board reflects the outcome of an
initial inconclusive debate on the issue following the release of the Ralph Review.
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It might be useful for me to provide some background on the TVM before describing
the consultation arrangements.

The TVM arose from a strong view that the existing law’s central tenets of ordinary
income, statutory income and the capital/revenue distinction create uncertainty and
complexity.

The TVM involves restructuring the income tax law around a common conceptual
platform with the objective of achieving greater legislative certainty, transparency
and integrity, among other things. Rather than legally defined concepts of income
and allowable deductions, the TVM’s focus is on the changing tax value of assets and
liabilities.

As an integral part of its evaluation and consultation strategy, the Board established a
small TVM Legislative Group to prepare draft TVM legislation and explanatory
material intended to demonstrate how the TVM might operate in practice. The TVM
Legislative Group has now drafted most of the core TVM rules, together with other
important rules for capital gains tax, depreciating assets, financial assets and
liabilities and the private/domestic distinction. It has also prepared a range of
explanatory material.

The Board has also established a TVM Working Group to provide expert advice to
the TVM Legislative Group in terms of identifying issues and suggesting solutions to
problems that emerge as drafting of the legislation progresses. The group also assists
the Board in its evaluation process. Chaired by Chris Jordan, the group currently is
comprised of some 19 tax experts drawn from the tax practitioner, accounting,
corporate finance, legal and academic spheres.

These experts are free to, and are in fact encouraged to, consult broadly with their
constituent groups and with the business community in general to bring ideas to the
TVM table.

Importantly, the Board has also provided an opportunity for all interested parties to
contribute to these processes by exposing on its web site all of the draft legislation
and other materials as they are produced. To date, for example, there have been four
versions of the draft legislation exposed, each refining and improving on the previous
version in light of comments received.

The early work of the Legislative and Working Groups also provided a focus for
discussions at a major conference convened by the Board in July 2001. The
conference was designed to elicit the key issues that would need to be addressed in
determining whether or not the TVM should proceed – and it certainly succeeded in
doing so!

With the draft demonstration legislation now largely developed, the emphasis is
shifting to effectively testing and evaluating the TVM concept.
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Some initial testing utilising the financial accounts of some of Australia’s largest
companies - BHP-Billiton, Australia Post and Telstra - and a range of small and
medium sized enterprises was conducted in the middle of last year. The results
suggested that there are no fundamental conceptual flaws in the TVM, even when
applying it to the most complex financial transactions of the major companies
concerned.

They also suggested that the information required to calculate taxable income under
the TVM was generally available from existing accounting records.

Additional compliance testing has been undertaken with the assistance of some 40 to
50 practitioners and firms.

The outcome of all of the draft legislative and other work that the Board has so far
sponsored was formally released for public comment on 6 March, and is now
available on the Board’s web site.

It provides a comprehensive framework by which those in the community who are
interested can make their own judgement about the relative merits of the TVM.
Public submissions have been called for by the end of April.

The Board has also commissioned analyses designed to generate information about
the potential transitional and on-going compliance costs of adopting the TVM. The
analyses will also consider whether TVM would result in a law that is more certain in
terms of determining the tax consequences of financial transactions. The results of
these analyses should be available by around the end of this month.

Following analysis of submissions and these further analyses, the Board hopes to be
in a position to make its recommendation on the future of the TVM to the
Government around end June this year.

I am sure you will agree that the Board’s approach to its evaluation of the TVM is
extremely comprehensive, is undertaking a comprehensive and open evaluation of the
TVM, and one that is quite unique in the history of tax law development in Australia.

It has emphasised, in particular:

•    open consultation and specialist engagement with the community from its
     earliest phase

•    extensive road-testing of the draft legislation, utilising ‘real’ company and other
     transactional information; and

•    comprehensive evaluation of potential compliance costs and other user issues.
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Integrity and functioning of the tax system
I have mentioned that the Board’s responsibilities include providing advice to the
Treasurer on improving the general integrity and functioning of the taxation system.

In developing its views on the integrity and functioning of the tax system, the Board
strongly emphasises the importance of establishing and maintaining strong and open
lines of communication with key stakeholder groups.

The intention is to remain well-informed of the major concerns and emerging issues
in the community in relation to the operation of the tax system, and to provide advice
to the Treasurer accordingly.

The Board has instituted, in conjunction with its regular monthly meetings, a program
of meetings with key stakeholder representatives. These meetings are intended to
give the Board some early indication of community concerns with, and priorities for,
the tax system.

Individual Board members have also been very active in participating in conferences,
seminars and the like, and in consulting through their networks on tax issues.

Business Tax Reform

Before concluding, I would also like to mention briefly the Board’s role to date in the
Government’s business tax reform agenda. When the Board was established in
August 2000, the consensus was that the Government’s remaining major business tax
reform tax reforms were too far advanced for the Board to play any meaningful
advisory role.

At the time, the Government was looking to progress five major initiatives, namely:

•    a new “entity taxation” regime;

•    a new regime for taxing consolidated company groups;

•    a Simplified Tax System for small business;

•    a new consolidated capital allowances program; and

•    new rules governing thin capitalisation and the borderline between debt and
     equity for tax purposes.

Processes, including of community consultation, for progressing these measures were
well advanced at the time the Board was established. However, as relevant decision
continued to be deferred, the Board was inevitably drawn into the strong public
debate surrounding some of them.

An upshot was that the Board recommended to the Treasurer in February 2001 that
the Government should defer implementing the proposed “entities” and “consolidated
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companies” taxation regimes, then to commence in July 2001, and to consider
generally revising the implementation timeframes of the rest. This advice reflected
deep public concerns that Board members were detecting from their own networks,
and from their discussions with the accounting profession.

The Treasurer accepted this advice, which he announced later that month. At the
same time, he flagged that the Board would have a role in the further consideration
that is to be given to the taxation of trusts, and in the consultative processes
associated with other remaining business tax reform measures.

Currently, the Board is exploring, from a “clean sheet”, issues associated with entity
taxation – and the taxation of trusts, in particular.

The Board has also been assisting in the development of the legislation for taxing
wholly-owned consolidated groups, including by appointing, at the request of the
ATO, a private sector expert to help the group oversighting this project.

Concluding Remarks
The Board of Taxation has clearly been very busy in pursuing its Charter of
enhancing community input to the processes for developing and implementing
taxation legislation.

Much of the focus to this point has been on exploring what the most appropriate
processes of community engagement in tax law design ought to be. The Board
expects to make its recommendations on this to the Government shortly.

The Board has also been very active in directly consulting, and otherwise facilitating,
expert input into specific tax measures planned or in the process of evaluation.

Clearly a lot has been achieved. The comprehensive consultation processes
surrounding the draft consolidation legislation is a good step in the right direction.

However, there is still a long way to go. A priority needs to be given to embedding
an appropriate “culture of consultation” on tax measures which seems to exist in
some other countries. Hopefully, we will achieve this, in the not too far distant
future, for the benefit of all Australians.

Thank you.

				
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Description: Speeches due 1 March 2002