Report on Aspects of Income Tax Self Assessment
The development of tax policy and the resulting law design can have implications for the self assessment environment. This Chapter considers these issues.
Tax policy can have a major impact on the structure of the tax law, its administration and compliance costs for taxpayers. As noted in the discussion paper, tax policy balances potentially conflicting objectives including revenue collection, economic efficiency, equity and other social goals, while attempting to minimise administration and compliance costs.
In general, a smaller set of tax policies with broad application will involve fewer concepts, less law and be easier to comply with than a larger set of policies, each with narrower application. However, the latter approach allows distinctions between taxpayers and/or activities to be recognised through different tax treatments, which may be important for equity or other reasons.
Policy is rarely more complex than it needs to be to achieve its objectives — the difficult question is often the degree to which exceptions should be accommodated and measures should be targeted. As a practical matter, simplifying policy to reduce the costs of self assessment would often mean either the removal of established concessions, or altering their scope by adjusting means tests or entry criteria.
Tax law design is the process of turning tax policy into legislation that can be passed by the Parliament, administered by the Tax Office and complied with by taxpayers. A key design choice relevant to self assessment is the amount of detail set out in the law.
Much of the tax law remains long and complex. In 1958 Sir Robert Garran recognised the inherent complexity in the tax law: 66
‘When war expenditure compelled the Commonwealth to resort to direct taxation, our first Income Tax Assessment Act was a thing of beauty and simplicity that would not have shamed Wordsworth or T. S. Eliot. But a graduated income tax tempts the crafty taxpayer to all sorts of devices to reduce his assessment; and just as in the Navy there was never-ending competition between guns and targets — armour being strengthened to stop missiles and missiles being weighted and hardened and speeded to pierce armour — so the battle of wits between taxpayer and taxation office led to all sorts of barbed-wire entanglements to keep the wily taxpayers from slipping through, till the Act became the literary monstrosity it is today.’
During the 1980s and 1990s the tax legislation set out in increasing detail how the law applied in a variety of fact situations. This was seen as desirable because taxpayers naturally want a high level of certainty as to whether and how the law will apply in their particular circumstances. While the ‘detailed’ approach to law does provide certainty where a taxpayer’s circumstances are specifically addressed by a rule, laws designed in this way can never anticipate all the relevant circumstances for every taxpayer.
As factual circumstances vary greatly, covering a wide range of circumstances in detail is likely to result in law that is long and complicated. Complex circumstances are not easily clarified through elaboration in the law, at least not without generating legislation of inordinate length. Indeed, by introducing more boundaries between the legal concepts, potentially there is increased scope for ambiguity and uncertainty. Long and detailed law can also make it harder to find the underlying policy intent and thus increase the risk that the courts will interpret the legislation in a way unintended by Parliament. When a statute is cast in a very specific way, new circumstances can generate loopholes or inequities, requiring further specific legislation and so on.
For these reasons, there has been increasing recognition in Australia and overseas of the benefits of using high level principles, rather than black-letter approaches, to draft the tax law.67 These principles synthesise the detail that would otherwise be set out in black-letter rules, to achieve the essential effect of the measure.
Treasury has been examining ways in which it might capitalise on the 2002 changes that brought the tax policy and the tax law design processes together within the Department.
A new design approach being developed by Treasury aims to write tax law in a series of operative rules that are principled statements about what the law is intended to do, rather than details about the mechanisms that get it there. This new approach will accommodate detailed or specific rules when required, but not as a matter of course. While not usually providing details about the cases it covers, it will provide a framework for working out how the law is to apply to each of them. Additionally, the approach will impose a discipline on the development of policy that could, in itself, result in less complex policy choices.
Treasury proposes to use this principled approach for new tax measures, except where those measures simply amend existing black-letter detail structures in the law and using the new approach would require extensive rewriting of the existing law.
In 2002, the Government undertook to carry out greater consultation in the development of tax policy and the design of the resulting law, including road testing draft legislation and related products prior to implementation. The Government’s in-principle position is that consultation will be undertaken on all substantive tax legislation, except where there is commercial or market sensitivity, or revenue or tax avoidance sensitivity.68 Treasury and the Board of Taxation carry out this consultation.
Consultation by Treasury
The type and extent of the consultation undertaken by Treasury on policy and legislative proposals depends on such issues as time constraints, the stage of the development process and the type of provision.69
Recent examples of consultation by Treasury include provisions for the taxation of discretionary trusts, the review of international tax arrangements legislation and many of the legislative provisions for the consolidation framework.
Treasury reports on consultations through the Board of Taxation.
Role of the Board of Taxation in consultation
The Board of Taxation is a non-statutory body established to advise the government on the development and implementation of taxation legislation and the operation of the tax system. A key objective of the Board is to ensure that there is full and effective community consultation in the design and implementation of tax legislation.
As part of this objective, the Treasurer has given the Board the role of monitoring the processes of consultation undertaken by Treasury. To assist in this role, Treasury reports to the Board three times a year, detailing the consultation strategy for each substantive tax proposal and the progress of that consultation.70
The Board is also tasked with advising the government on improving the general integrity and functioning of the tax system and commissioning research and other studies on tax matters approved or referred to it by the Treasurer. The Treasurer has, on occasion, referred consultation on draft legislation to the Board. Recent examples include consultation on the taxation of discretionary trusts and on the workability of exposure draft legislation defining a charity.
A number of submissions raised ways to streamline the process and time for Parliament to pass minor policy changes and technical amendments to the tax law.
The Parliamentary legislative timetable is determined by Government prioritising measures to be introduced in bills. Minor or technical amendments are understandably given a lower priority over other measures that are required to protect the revenue or implement the Government’s policy platform. It may not be feasible for governments to introduce bills containing only minor or technical amendments on a regular basis, without delaying the introduction of other measures. However, minor and technical amendments are generally progressed each sitting in bills containing a number of miscellaneous tax measures. These may well be non-controversial bills and may therefore undergo a less rigorous and less time consuming Parliamentary process.
New Zealand approach to developing tax policy
One example of an attempt to streamline the tax policy process comes from New Zealand. In 1993, New Zealand developed the Generic Tax Policy Process (GTPP) as a result of Government dissatisfaction with certain tax policy outcomes and concern regarding the process for developing tax policy, legislation and consultation. The main objectives of the GTPP are to:
- encourage earlier, explicit consideration of key policy elements and trade-offs by Ministers
- provide opportunities for substantial external input into the policy formulation process, to increase transparency and to provide for greater contestability and quality of advice at both the conceptual and detailed design stages
- clarify the responsibilities and accountabilities of participants in the process
- ensure that the performance of tax policy initiatives, as well as the process of reform, is reviewed regularly.
Formal consultation (undertaken at different levels depending on the measure) can involve the release of issues papers, discussion documents and draft legislation. In addition, the Inland Revenue Department consults regularly with stakeholders on an informal basis (including before options are put to government for consideration and released publicly).
The process of policy and legislative development in New Zealand is characterised by a relatively high degree of transparency. However, it is generally accepted that proposals subject to the GTPP will take up to two years to develop and implement. Furthermore, it is not applied to a number of measures (particularly tax avoidance measures) and there is concern that too many documents are released for public comment.
The Board of Taxation (in conjunction with Treasury) should review international consultation processes with a view to identifying any improvements to the Australian system, especially in respect of non-controversial minor policy or technical amendments, and report to government.
Submissions have also suggested that Parliament should not pass retrospective tax laws.
At various stages Parliament has reiterated its reluctance to pass retrospective tax laws except in limited circumstances. Evidence of this can be seen in comments made by the Scrutiny of Bills Committee, the Senate Standing Orders and Parliamentary debates.
The Scrutiny of Bills Committee examines all bills which come before the Parliament. It is governed by Senate Standing Order 24 and, in particular, the five principles set out in that Order. The relevant Order provides:
‘24. (1)(a) … the Scrutiny of Bills shall be appointed to report, in respect of the clauses of bills introduced into the Senate, and in respect of Acts of the Parliament, whether such bills or Acts, by express words or otherwise: i) trespass unduly on personal rights and liberties …’
This principle has been interpreted as requiring the Committee to draw the Senate’s attention to legislation that is to apply retrospectively (if passed). Usually if retrospective legislation is introduced the Committee will comment that the provisions breach the principle in the Order. However, provisions that have a beneficial effect are less likely to be commented on adversely. This principle has also been interpreted as requiring the Committee to draw attention to legislation that is expressed to operate from the day of an earlier press release foreshadowing the legislation.
Senate Standing Order 30 also addresses retrospective bills, solely in the tax context. The Order states that, where tax bills have been announced by press release more than six months before their introduction into Parliament (or publication), they will be amended to provide for a commencement date after the date of introduction (or publication). In this way, the Senate Standing Order is intended to reduce the period of retrospectivity, so that the law may commence no earlier than the time the bill was made public.
The Review concludes that the application date of measures should remain an issue to be examined and determined by Parliament on a measure-by-measure basis. While ideally, tax measures imposing new obligations should apply prospectively, retrospective start dates may be appropriate where a measure:
- corrects an 'unintended consequence' of a provision and the Tax Office or taxpayers have applied the law as intended
- addresses a tax avoidance issue
- might otherwise lead to a significant behavioural change that would create undesirable consequences, for example bringing forward or delaying the acquisition or disposal of assets.
Some submissions suggested that the Government should reactivate the Tax Law Improvement Project. That project arose out of a recommendation in 1993 by the Joint Committee of Public Accounts that a task force be established to restructure, renumber and rewrite the Income Tax Assessment Act 1936. 71 The first package of draft legislation developed by the project was introduced in 1995 (the Income Tax Assessment Act 1997). Tax Acts introduced since 1997, have, wherever possible, been drafted in the style developed by the project.
As the project was designed to rewrite the tax law over a considerable time, the Australian tax system concurrently has two operating income tax assessment Acts.
In 1998, the Government released a tax reform package titled Tax Reform: not a new tax, a new tax system (ANTS).72 The project was subsumed into tax reform so that drafting energies could focus on new law.
In 2003, the Board of Taxation began to scope a possible project for rationalising the ITAA36 and ITAA97. The Board’s purpose is to see whether there may be relatively straightforward options for reducing the volume of tax legislation and making it easier to use for taxpayers and their advisers — both in the short-term and by providing a better platform for longer-term improvement.73 The Government is currently awaiting advice from the Board on this issue.
The Review was originally asked only to review aspects of the income tax self assessment system and, therefore, the Review has limited its recommendations to those pertaining to the income tax system and not other taxes (such as fringe benefits tax, the goods and services tax, or the various excises). However, a number of submissions have suggested that some of the recommendations should apply to all federal taxes.
For example, for the purpose of simplicity, it would be ideal if the same penalty, interest, advice and period of review regimes applied to all federal taxes, where appropriate. Where variations are necessary to suit the circumstances of particular taxes, those variations should be changes from a common base, rather than being given effect through a different system.
The penalty system for tax shortfalls is already implemented through provisions in the Taxation Administration Act 1953 (TAA) and applies to all federal taxes.
Application of the general interest charge is also provided for in the TAA.74 The Division that provides for it lists the circumstances in which the interest charge will apply (including application to other federal taxes beside income tax).
The rules for taxpayer protection by Tax Office advice vary across the different federal taxes. Although the TAA provides for the application of private binding rulings and public rulings under the current system, these provisions do not apply to all taxes.75
The periods of review applicable to income tax are provided for in the ITAA36 and therefore apply only to income tax. 76
The Review team concludes that a more uniform application of the core provisions for each of these categories across all federal taxes should be closely examined.
Treasury should review the possible application of the recommendations contained in this report to all federal taxes.
In order to fulfil his role in the tax system, the Commissioner of Taxation has a general power to administer the income tax laws.77 This power has been provided for because it is recognised that in order to administer the Australian tax system efficiently and fairly, the Commissioner must necessarily make judgments and take actions, in the interest of good management of the system, that are not necessarily spelt out in detail in the statutes.
In practice, this ‘power’ means that the Commissioner has the ability to make administrative decisions in a way that will give effect to the object and purpose of the legislative provision being applied, improve the smooth running of the tax laws and assist taxpayers to more easily comply with the tax law.
Several submissions asserted that the Commissioner could make more effective use of the administrative power by adopting the extra-statutory concessions (ESCs) system used in the United Kingdom (UK).
The UK Inland Revenue ESCs are relaxations of the strict interpretation of the UK’s tax laws for the purposes of making administration of the tax laws easier or to provide taxpayers with relief from hardship at the margins of the tax law. For example, where a new tax law produces unintended consequences which could be resolved with a lengthy statutory remedy, the Inland Revenue can instead grant an ESC to produce the same effect, whilst avoiding the time delays and cost associated with a statutory change. ESCs are published by the Inland Revenue and can be relied on by taxpayers to bind the Inland Revenue, provided they are not used for tax avoidance.
Using slightly different means, the Australian system achieves the same result. Through the binding ruling system (especially as modified by the recommendations of this review) and the general administrative power, the Tax Office may make statements of interpretation or intended compliance practice. Having made such a statement, any favourable application of the law by the Commissioner under the statement will effectively bind the Commissioner, even if his opinion is later found to be incorrect at law. All that is required is that such action be taken in good faith, in the interests of the proper administration of the system and that the position is not detrimental to taxpayers compared to the position under the law.
Moreover, the Tax Office has not requested further specific powers to facilitate its administration.
Accordingly, the Review has concluded that no further statutory provisions are required for the Commissioner to fulfil his duties as administrator of taxation laws in Australia.
A number of submissions raised questions about the appropriate method for compensating taxpayers who have suffered detriment caused by actions of the Tax Office.
There are a number of compensation mechanisms already available under both the common law and Commonwealth legislation78 for detriment caused by Commonwealth agencies, including the Tax Office.
The scheme most closely aligned to ideas raised in submissions is the scheme for Compensation for Detriment caused by Defective Administration (CDDA). The CDDA provides Commonwealth agencies with a discretionary authority to compensate persons who have suffered detriment due to the ‘defective' actions or inaction of such agencies, where the claimant has no legal or statutory right of redress.79 The administration of the scheme is overseen by the Department of Finance and Administration.
Defective administration refers to any of the following:
- a specific and unreasonable lapse in complying with existing administrative procedures
- an unreasonable failure to institute appropriate administrative procedures
- an unreasonable failure to give the proper advice that was within the official's power and knowledge to give (or reasonably capable of being obtained by the official)
- the provisions of advice that was, in all the circumstances, incorrect or ambiguous.
The Australian National Audit Office recently released its report, Compensation payments and debt relief in special circumstances,80 in which the Department of Finance and Administration announced that it would examine the workability of the CDDA scheme.81
Other Commonwealth compensation mechanisms include:
- act of grace payments. These are compensation by way of special discretionary payments where there is no other viable avenue of redress available and the Minister or delegate considers the payment is appropriate because of ‘special circumstances’
- release from tax liabilities in cases of serious hardship
- waiver of debts owing to the Commonwealth and postponement of the right of the Commonwealth to recover a debt in priority to another debt
- write-off of debts owing to the Commonwealth.
In addition, common law remedies of misfeasance and negligence may apply.
The Review is in favour of maintaining the current uniform systems, rather than introducing a tax specific compensation regime. In view of the Department of Finance and Administration’s announcement that it will review the CDDA, the Review concludes that no specific recommendations are required at this time.
Many submissions voiced concern with the lack of transparency of the administration of the general anti-avoidance provision (Part IVA). The fact that the Tax Office’s view on how it considers Part IVA applies is spread across a number of products means that their approach is not easy to ascertain. This has created an impression that the provisions may be invoked arbitrarily, notwithstanding the Tax Office’s processes to control the application of Part IVA, such as the Part IVA Panel. Other submissions suggested that a review should be undertaken to determine whether Part IVA is currently operating in a way that reflects the policy intent.
In order to help address the first of these concerns, Chapter 2 recommends that the Tax Office consolidate its advice on the way it interprets and administers Part IVA into a single document.82
In response to the latter, the Review considered whether a formal review of the operation of the provisions should be commissioned. Since release of the discussion paper, the Tax Office has announced that, in order to enhance the Part IVA Panel's consideration of particular cases, they will: 83
- introduce arrangements to allow taxpayers the opportunity of personally presenting the facts and their position to the panel
- promulgate guidelines for taxpayers and advisers appearing before the panel
- invite the Corporate Tax Association to nominate a Panel representative.
The Review has concluded that these initiatives will go a long way to improving perceptions of fairness and transparency in the application of the general anti-avoidance provisions and that, accordingly, no formal review of Part IVA is necessary at this time.
However, there are a number of specific anti-avoidance provisions remaining in the tax law. ANTS recognised the need for a review of these provisions in order to identify which could be consolidated or removed.84 This was supported in the Review of Business Taxation (the Ralph Review).85
Treasury has begun reviewing the specific anti-avoidance provisions in order to determine whether they are necessary, and will report to government in due course.
Many submissions identified the volume of income tax law as an issue. However elegantly written, well laid out or helpfully structured, the sheer volume of information in tax laws can be a barrier to their usefulness. While it is true that few taxpayers ever need to deal with more than a few provisions of the law, nevertheless those parts are scattered throughout the Acts, amongst more obscure and sometimes inoperative material.
The Board of Taxation is currently in the process of identifying the inoperative provisions in the income tax law and will report its recommendations to Government. These recommendations could potentially include repealing some inoperative provisions.
Another approach suggested is to collect the relevant operative provisions for individuals and small business into a separate Part. That is, it may be possible to place all of the material required by large numbers of taxpayers with simple affairs together in one spot. This could reduce the number of provisions these taxpayers and their advisers need to be aware of and understand in order to fulfil their obligations under self assessment.
Treasury should examine the possibility of reducing the volume of law that needs to be accessed by individuals and small businesses with very simple affairs.
66 . Garran, Sir R 1958, Prosper the Commonwealth, Angus and Robertson, Sydney.
67 . Commonwealth of Australia 1998, Tax Reform: not a new tax, a new tax system, August 1998, Commonwealth of Australia, Canberra, recognised that the tax laws were too complex and announced that in the future the Government would endeavour to design the tax code using general principles in preference to long and detailed provisions (p. 149). See also Braithwaite, J 2003, ‘Making tax law more certain: A theory’, Centre for Tax System Integrity, Australian National University, Canberra.
68 . Costello P (Treasurer) 2002, Reforms to community consultation processes and agency accountabilities in tax design, Parliament House, Canberra, 2 May 2002.
69 . See Commonwealth of Australia the Treasury 2004, Consultation on Tax Design, Commonwealth of Australia, Canberra,
71 . Commonwealth of Australia Joint Committee of Public Accounts 1993, An Assessment of Tax, Report 326, 1993, Commonwealth of Australia, Canberra.
72 . Commonwealth of Australia 1998, Tax Reform: not a new tax, a new tax system, August 1998, Commonwealth of Australia, Canberra.
74 . Part IIA, Division 1, TAA.
75 . Part IVAAA and Part IVAA, TAA.
76 . Section 170, Part IV, ITAA36.
77 Section 8 of the ITAA36: ‘The Commissioner shall have the general administration of this Act’.
78 . For example, the Financial Management and Accountability Act 1997 provides for act of grace payments and waiver of debts.
79 . Department of Finance and Administration 2004, Finance Circular 2001/01, Commonwealth of Australia, Canberra, viewed on 28 June 2004,
80 . Auditor-General (Australian National Audit Office) 2004, Compensation Payments and Debt Relief in Special Circumstances, Commonwealth of Australia, Canberra, viewed 29 June 2004,
81 . Auditor-General (Australian National Audit Office) 2004, Compensation Payments and Debt Relief in Special Circumstances, Commonwealth of Australia, Canberra.
82 . See Recommendation 2.10.
83 . Carmody, M 2004, The art of tax administration: two years on, address by the Commissioner of Taxation to the 6th international conference on tax administration, Sydney, April 2004.
84 . Commonwealth of Australia 1998, Tax Reform: not a new tax, a new tax system, August 1998, Commonwealth of Australia, Canberra, p. 150.
85 . Commonwealth of Australia 1999, Review of Business Taxation: A tax system redesigned, July 1999, Commonwealth of Australia, Canberra, Recommendation 6.6.