Assistant Treasurer, Minister Assisting for Financial Services & Superannuation and Minister for Competition Policy & Consumer Affairs
5 March 2012 - 18 September 2013
Consultation in the Tax Design Process
7 September 2012
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Thank you for that kind welcome, and for the invitation to speak to you today. It's a pleasure to be here, and to see so many familiar faces.
Today I want to talk about the Government's tax reform agenda and the role of consultation in delivering good tax laws.
This is an important topic that I know many of you here have a keen interest in. In fact, I would like to begin by acknowledging the significant contribution of the Tax Institute to tax consultations over the years.
The Government recognises the importance of effective consultation in developing good tax policy.
That's why, in 2008, we established a Tax Design Review Panel to examine how to improve the quality of tax law through better community consultation.
Since then, we've asked the Board of Taxation to report on what improvements have been made as a result of acting on the Panel's recommendations.
The Board has now provided me with its report, and later on I'll discuss the findings and the Government's response and set out how I think we can continue to improve our consultation processes.
The Government's tax reform agenda
But first I want to talk briefly about the Government's tax reform agenda.
Tax reform has been a major priority of this Labor Government.
We initiated the Henry Review, which set out the principles that will guide the future of tax reforms in this country for decades to come.
And contrary to some public commentary, we have made significant progress on many of the reforms it recommended. The Government has so far announced some 40 measures that progress recommendations of the Henry Review.
Last year's successful Tax Forum continued the conversation initiated by the Henry Review and I know that many of you participated in that process.
The Government has since set up a number of Groups to keep the momentum going, including: the Business Tax Working Group, the Superannuation Roundtable and the Not-for-Profit Sector Tax Concessions Working Group.
And we have been getting on with the job of progressing many important tax measures in the Parliament.
In the last two years, the Government has introduced over 50 tax and superannuation Bills containing over 100 measures.
And the work continues. In the current sittings of Parliament we can expect another 10 Bills containing around 20 measures.
At this year's Budget, the Government set out a Road Map for further reform. In the Road Map, we committed to a tax system that invests in a productive economy, rewards effort and is fair and sustainable.
I have said before that reform of our taxation system is not an overnight affair. It takes time, patience and often requires the cooperation of, or at least that a fair hearing be given to, many competing interests. This is especially the case in our modern political environment where we must navigate the challenges of minority government and, on occasions, even contend with vocal and well resourced vested interests willing to actively campaign against reform.
Consultation in the tax design process
As I mentioned before, I want to talk today about consultation.
Trends in consultation
In recent years, the community's expectations of government consultation in all areas of policy have grown considerably.
This trend is not only apparent in Australia. Around the world governments are increasingly making use of consultations to improve policy outcomes.
And of course that includes tax policy. Consultation is particularly valuable in a complex area like tax.
In many cases, it would be difficult to fully grasp the consequences of a proposed change to the tax system without discussing them with the people who would be affected by the change, and with the people who know about the tax system and the broader economic and social environment in which it operates.
While we have come to expect consultation on tax policy and legislation as the norm, it's worth remembering that until the early 2000s consultation was largely confined to administrative matters.
The Ralph Review of Business Taxation in the late 1990s concluded that this lack of consultation with the tax system's ultimate users was partly to blame for widespread dissatisfaction and frustration with the business tax system at that time.
By contrast, today we are in a position where the overwhelming majority of measures are the subject of consultation both on the policy design and draft legislation.
At the moment, Treasury is consulting on two discussion papers and seven exposure drafts. And there are around five discussion papers and 35 exposure drafts currently in preparation.
This shift towards greater consultation can only be good for policy outcomes. That's why the Government welcomes these advances. And why we are committed to the continuous improvement of our consultation processes.
The scale of the Government's taxation reform effort has combined with this improved commitment to consultation to place increased demands on those practitioners and stakeholders wishing to actively contribute to the law making process. The Government does recognise this and we do especially thank those of you who have embraced the opportunity to contribute in this way.
The purpose of consultation
At its best, tax consultation should be a collaborative endeavour.
And this collaboration can occur throughout the law design process, from diagnosis to delivery.
Consultation often begins with stakeholders identifying areas of the tax law that could be improved. One example is the Tax Issues Entry System, which I will talk about more later.
At the policy development stage, consultation can help the Government better understand the practical and commercial issues relevant to particular industries and assess the effectiveness of various policy options given these realities.
At the legislative design stage, drawing on the expertise and knowledge of people who deal with the issues on a day-to-day basis can improve the design and quality of the tax law and help to ensure that we get the policy direction right.
Once the legislation is at the exposure draft stage, consultation can help clarify the policy intent. This enables stakeholders to address in their submissions any concerns they have with the workability of the draft legislation and can help identify and eliminate any unintended consequences.
Consultation can also help prioritise tax legislation.
Today I am going to talk about all of these stages in tax law design – and how we can improve them.
But first I want to talk about some of the challenges of consultation and reflect on concerns that have been identified from recent experiences and reviews.
The challenges of consultation
While its benefits are obvious, effective consultation is not without its challenges.
For one thing, it's important to acknowledge that there is a trade-off between the time consultation takes and the quality of the final outcome. That is, extensive consultation tends to increase the time from the announcement to the implementation of a measure, but it will generally improve the final outcome.
This trade-off is often overlooked by those who demand both more consultation and faster implementation. The truth is that a balance must be struck between these two objectives.
There have been some recent lessons
I think it's fair to say that we've also learnt some lessons about the potential consequences that arise where consultation fails to identify key problems and the final legislation is not consistent with the original policy intent.
I can think of no better example than the 2010 amendments to the Consolidation regime now known – infamously perhaps – as the rights to future income issue.
In 2010 the consolidation regime was amended to broaden the scope of the residual tax cost setting rule and introduce the rights to future income rule.
Those amendments, which were developed in consultation with key stakeholders, sought to remove uncertainty in the law that had been identified and announced back in 2005.
They also clarified the tax outcomes for assets that are rights to future income (such as an entitlement to unbilled income). The amendments applied from 1 July 2002 as they were thought to be merely returning the regime to its originally stated intent.
However, by the end of 2010 evidence began to emerge that the new rules, combined with a taxation ruling on the meaning of an asset for consolidation purposes and a change to an accounting standard on intangible assets, could result in the recognition of the tax costs of some assets being brought forward in an unanticipated way.
Consequently, on 30 March 2011, the Board of Taxation was asked to examine the operation of the residual tax cost setting and rights to future income rules. The Board handed its report to the Government on 31 May 2011 after undertaking public consultation.
The Board concluded that the scope of the new rules, as enacted, appeared to be broader than was originally intended at the time of their announcement in 2005.
Combined with the effect of other long standing elements of the consolidation regime, the new rules could allow consolidated groups to access deductions that are not available to taxpayers outside the consolidation regime.
Significantly, the Board found that taxpayers had made claims in excess of $30 billion under the rules, many of which were not within the intended scope of the rules.
Before acting on the Board's report, the Government undertook further consultation with a working group of tax experts and key industry bodies, including representatives of the Tax Institute, to discuss the issues raised by the Board and to determine the details of the Government's response.
During the very early stages of this process, it was clear that the working group participants did not support retrospective changes to the law designed to remove benefits from affected parties.
Perhaps it is not surprising, but it is worth noting, that we did not hear the same objections about retrospectivity when the beneficial 2010 amendments were made, even though they also went back to 2002.
This experience demonstrates some of the problems that can arise where the final legislation does not deliver on the original policy intent.
But this example also demonstrates that you can have a constructive consultation process even when some participants expect that the outcomes will not be favourable to them. The Government appreciates the very professional approach taken by the participants in this consultation process.
Prioritisation of existing and new measures
Having discussed some of the challenges and recent experiences, I would like to talk about the further steps we are taking to improve consultation in the tax design process.
The Joint Professional Bodies, which includes the Tax Institute, recently conveyed to the Government their concerns about the number of announced but unlegislated measures and how this is contributing to taxpayer uncertainty.
Looking back over the years, this has always been a challenge for Governments and stakeholders.
The world is always changing, and taxpayers – especially business taxpayers – expect our tax system to keep up with the modern and increasingly global economic environment.
Let me tell you, there is no shortage of people who want Government to announce a further change to the tax laws in one way or another.
Just as there are trade-offs to be made between more consultation and faster enactment of measures, there is also a constant tension between the demands to announce new measures to improve the operation of our tax laws and the desire to enact measures that have already been announced.
The Government has and continues to pursue an ambitious agenda in all areas, not just tax reform as I discussed earlier.
And we have done this notwithstanding that more Parliamentary time is devoted to private members' business — leaving less time for the business of Government.
Following a recommendation from the Tax Design Review Panel, Treasury now publishes a monthly Forward Work Program outlining discussion papers and exposure drafts of legislation currently open for consultation, as well as those in preparation and their anticipated release dates.
Taxpayer representatives have indicated strong support for the monthly release, observing that it helps them contribute more effectively to tax law development.
Nevertheless, the Government shares the concerns raised by the Joint Professional Bodies and is considering ways to address the legislative pipeline.
To discuss these, and other important issues, I can announce today that I will commit to formalising my direct engagement with the tax profession by holding twice-yearly meetings with representatives of the Joint Professional Bodies, with the first of these meetings to occur later this year.
As has been the case with my predecessors, I regularly meet with representatives of these organisations individually. I do think, however, there is some merit in formalising a process of direct ministerial engagement that allows me to gauge the collective views of our key professional and taxpayer representative bodies.
In these discussions, I also want to discuss the opportunities for increasing the use of information technology to enhance and where possible streamline the consultation process.
Tailoring consultation to the issue
Today I am releasing the Board of Taxation's post-implementation review of the tax design review panel recommendations.
This report found that while there had been improvements in the tax design process since 2008, more can be done to strengthen the tax design process.
Treasury has recognised this. It conducted a Strategic Review last year and is strengthening its engagement across the board.
In the tax area, it has initiated a program of bi-annual stakeholder forums, intended to better inform stakeholders of the broader context in which tax policy and law are being developed. I understand that Robert Jeremenko has contributed much to these meetings.
The Board of Taxation Report noted that while there has been a genuine improvement in the consultation process, more could be done to improve the quality of that consultation.
It is important to acknowledge that successful consultation will require more than the bureaucratic exercise of ticking off a checklist.
Each consultation will be different depending on the nature of the issue, and on the knowledge and perspectives Government and stakeholders bring to the table.
In its report on the implementation of the Tax Design Review Panel recommendations, the Board strongly recommends that the level of interaction between the government and stakeholders be determined in a systematic way that reflects the nature of the proposal, the respective positions of the parties, and the knowledge each possess about the proposal and its consequences.
The Government has accepted this recommendation and tasked Treasury to implement procedures that deliver such an approach.
I want to talk about a current example where we have adopted a tailored consultation process – an example I know you have been talking about at this Workshop.
I'm aware that the changes to Part IVA that the Government announced is a cause of concern for some in the taxpayer and adviser community.
And I know that not everyone in this room will agree with the Government's position on the need for changes to Part IVA.
But we can all agree that Part IVA is both a significant and complex area of the tax law, with a lot of case law behind it.
That is why the Government is consulting thoroughly on this issue.
Before my predecessor Mark Arbib announced that the Government would amend the law, the Government conducted targeted consultation.
Following this, in May I announced the establishment of an expert roundtable to provide advice on how best to implement the proposed clarifications, without having unintentional effects on commercial and business activity. The roundtable's role is to provide advice on implementation, rather than revisit the Government's announced policy decisions.
The roundtable comprises legal experts and academics, and representatives from tax and accounting bodies, including Mr Grant Wardell-Johnson from the Tax Institute.
I understand the process has been constructive so far and I thank the Tax Institute for their contribution.
We are also seeking formal advice from senior tax barristers to ensure that the draft amendments are effective and do not have any unintended consequences.
I have put this comprehensive consultation process in place to ensure that the vast majority of taxpayers who do the right thing and pay their fair share of tax are not inadvertently affected by these changes.
I know that some might like to see this change implemented more quickly but it's important to recognise that hurrying the consultation process may pose risks to the quality of the final outcome.
Consultation before decisions are taken
As part of the recommendation to adopt a more systematic approach to consultation, the Board of Taxation also recommended the Government generally consult on tax changes at the initial policy design stage.
Government has an obligation to protect the revenue and make decisions in the national interest, particularly in tight fiscal circumstances. This is what all taxpayers expect of the Government and we make no apology for this.
When it comes to tax, it's no surprise that sometimes those decisions aren't popular.
Of course, there can be benefits in early consultation, particularly when there is an exploration of new and complex proposals or major reforms.
One example of this is the Business Tax Working Group.
Business Tax Working Group
As you know, the Business Tax Working Group was a key consultation process that came out of last year's successful Tax Forum.
The BTWG is looking at how our business tax system can be improved to assist with the challenges and make the most of the opportunities afforded by some of the broader economic transformations happening across our economy.
As you all know, the BTWG recently released a discussion paper on how a cut to the corporate tax rate might be fully funded from within the business tax system.
Clearly, this process has shown that early and widespread consultation is not always universally welcomed, especially where particular industries and sectors believe that such a process may lead to decisions being taken that may not be entirely favourable to them.
I encourage everyone to participate constructively in this process so that the BTWG can evaluate all of the issues – the upsides and the downsides – with the best available evidence.
However, this type of consultation won't always be possible – particularly in the Budget context where decisions are taken confidentially.
But in instances where there may not have been an opportunity for consultation prior to Government taking a decision, there is typically consultation on the policy design and draft legislation. The structure of the current Parliament has also facilitated a greater ventilation of stakeholder views on legislation through the House and Senate Committees – a prime example is the Australian Charities and Not-for-Profits Commission Bill currently before the Parliament. I released an exposure draft that was subsequently reviewed by the House Economics Committee, and the final version of the legislation has now been referred to two further Parliamentary committees for scrutiny by MPs and Senators and feedback from stakeholders.
And finally in that process, Government will also give strong consideration to post-implementation reviews for significant issues, recognising that circumstances change over time and this can have an impact on the efficacy of the regulatory environment.
New Law Design Practice will improve consultation
The Board of Taxation's report and the Government's response shows that to improve tax law design, it is not enough to choose the right approach – it requires good project management and quality assurance processes.
The Government has asked Revenue Group to respond to these challenges and ensure that the level of technical expertise it currently possesses is sustained into the future.
To meet this challenge, Treasury will formally bring together its tax law design expertise into a Revenue Group Law Design Practice (LDP) — headed up by its own General Manager.
The Law Design Practice will have three key roles:
First, to ensure that when a policy is being developed, the legislative possibilities and complications are taken into account from the outset – including in the setting of priorities.
The Law Design Practice will coordinate priority setting for tax and superannuation measures and actively project manage the development of those measures, in consultation with the Office of Parliamentary Counsel.
Second, it will ensure that measures are consistent with other law and legal policy of the Australian Government.
Third, the Law Design Practice will be responsible for ensuring that the final legislation that is introduced delivers on the Government's intent in practice, both directly and in how it interacts with the rest of the tax and superannuation law.
Over the last 12 months, Treasury and the Tax Office have reflected on ways to improve the quality assurance of tax and superannuation measures.
Each organisation will improve its own internal processes to assure the Government of the quality of tax and superannuation measures. This will include joint sign off by senior officers in each organisation that the Government's policy intent is clear and that the law will be administered consistent with that intention.
Consultation as a mutual obligation
I have talked about a number of concrete steps that we are taking to build on the work that has already been done to improve the quality of consultation and tax law design.
This includes how taxpayers and their advisors are taking a more active part in the development of the tax law.
While I believe this brings benefits for law design, I do think it brings a shared responsibility for getting the law right.
Participants need to come to the table with more than their client's interest in mind. Just as stakeholders rightly demand greater transparency of Government, so stakeholders have a responsibility to be upfront and honest when taking part in consultations.
I know that this is a point that is well understood by most stakeholders.
It's an issue that received attention in the Board of Taxation report.
Specifically, the report recommends an explicit ethical framework for consultation.
For many, this means having regard to the national interest. Everybody will have their own idea of what this could mean, but I hope we would all agree that it means the maintenance of a fair and strong tax system that can raise the required revenue to fund the public goods that Australians expect and deserve.
I agree with the Board's view about the need for considering the national interest in tax consultation and invite you to share your views about how to implement this idea.
I am keen to talk about this issue with the Joint Professional Bodies in the first of our twice yearly meetings.
On behalf of the Government, I welcome the Board's endorsement of our efforts to improve consultation, and I thank the Board for undertaking this review.
Board of Taxation report on the Tax Issues Entry System
Today I am also releasing the Board's report on the Tax Issues Entry System and the Government's response.
The TIES itself was a recommendation of the Tax Design Review Panel, and an initiative implemented by the Government to improve the tax consultation process.
The Board of Taxation Review made a number of recommendations to improve the visibility of TIES and the communication processes associated with it; and to enhance existing consultation and feedback arrangements.
Many of the issues raised have already been progressed.
For instance, a number of steps have been taken to improve the awareness of TIES in the community. Let me also encourage the TIES working group to continue to do everything it can to raise awareness of TIES.
The Board recommended that responsibility for the TIES website be allocated solely to Treasury, but I've asked Treasury and the ATO to continue to maintain TIES, as in the Government's view the benefits of moving the website would not outweigh the costs.
Treasury and the ATO are jointly committed to improving the quality of the feedback provided to TIES correspondents and ensuring that new issues are uploaded to the register as soon as possible.
There is much more that could be said on the subject of consultation in the tax design process but I have been speaking for long enough.
I'll summarise by saying that the Government is committed to continuously improving its policy development and design process and involving stakeholders more.
I look forward to working with members of the Tax Institute on these matters in the future.