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. 2 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 3 • 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. 4 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. 5 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. 6 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 7 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. 8 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. 9 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. 10 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 11 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.