Thursday, 26 June 2008
Public Accounts and Audit Committee; Report
On behalf of the Joint Committee of Public Accounts and Audit, I present the 410th report of the committee, Tax administration. I seek leave to move a motion in relation to the report.
That the Senate take note of the report.
Today’s report on the Australian Taxation Office is the first involving that agency since the 1993 Joint Committee of Public Accounts report An assessment of tax, which had such a lasting impact on taxation administration in Australia together with its associated improvements to self-assessment that were made at the time. In today’s report, the committee is satisfied generally with the tax office’s overall performance. Good tax administration requires tax authorities to strike a delicate balance between efficiency and fairness—and, generally, the tax office achieves this balance.
The inquiry commenced in December 2005 and it received 58 submissions from such peak bodies as Treasury and the tax office, external scrutineers such as the Audit Office and the Inspector-General of Taxation, professional groups, and individual taxpayers. The committee held five hearings in the second half of 2006. Following this, the committee held biannual meetings with the commissioner and his staff. These meetings have helped the committee to stay up to date in the world of tax, which is fast-moving—as all in this parliament know. Submissions generally focused on the complexity of our tax laws. In 2004, Australia had the third most complex tax system of the 20 largest economies in the world. Admittedly, the recent repeal of the inoperative tax law has made Australia’s tax laws a little less complex. However, on this league table of complexity, Australia has probably only dropped from third to fourth place.
Complexity is important because of the self-assessment system. Taxpayers take the risk of penalties and interest if the tax office amends their return and finds a tax shortfall. Complex tax law increases the chance of taxpayer error and taxpayer risk. Simplifying the tax law depends on coherent, simple tax policy, which in turn depends on thorough consultation. This is exactly what the committee recommended in 1993 but, unfortunately, neither side of politics has been able to deliver it in a significant way. Redrafting the tax law into plain English was well intentioned; however, it has not simplified our tax law. Anthony Mason, a former Chief Justice of the High Court, has publicly confirmed this. The current government has commenced a tax review—and that is welcome—entitled Australia’s Future Tax System. This has the potential to conduct the thorough consultation on tax law that the committee recommended 15 years ago. I wish the review panel well in this challenging but important task.
Another important issue in the report is the court case of Essenbourne, decided in late 2002. Broadly, the Federal Court found that a particular transaction between related entities did not attract fringe benefits tax but was not an allowable tax deduction. The decision meant that the arrangements were no longer financially attractive. The tax office, however, took the unusual step of neither accepting the decision nor appealing it. Instead, the tax office stated that it would attempt to bring another test case on the fringe benefits tax question. In early 2007, the Full Federal Court gave its decision in Indooroopilly, which confirmed Essenbourne. The tax office’s conduct increased taxpayer uncertainty. If taxpayers followed Essenbourne, they faced the risk of tax office litigation. However, if they took the tax office view, they might be paying unnecessary tax. More importantly, the case raised the question of whether the tax office was actually following the law.
The tax office has received legal advice that it may take the course of action decided on if it acts quickly. However, the committee believes that a court decision represents the law and should be followed. This was the view of the Full Federal Court in Indooroopilly, where Michael McHugh, when he was a High Court Justice, also made a statement to this effect. The committee recommended that the tax office should either appeal or accept court decisions. If the tax office has concerns about how a court decision will affect the tax system or the revenue, it can always refer the matter to Treasury. The committee’s report confirms the view of senior judges. Given this consensus between the parliament and the judiciary, it may be appropriate for the tax office to publicly announce, in the near future, that it will implement the committee’s recommendations.
In tabling this report, I would like to acknowledge the many people who contributed to it. In particular, I note the contributions of the peak bodies, agencies and all the individuals who gave their time and their expert knowledge to the committee. By listening to them, I believe we have improved our own degree of expertise. I would also like to thank the secretariat, who drafted the report according to the committee’s requirements. Finally, I would like to thank my fellow members of the Joint Committee of Public Accounts and Audit, the most senior committee of the parliament, for their constructive, collegiate and professional attitude to this inquiry and for their work on the committee. I note that this is my final report for the Joint Committee of Public Accounts and Audit concerning tax, and I wish the committee well in the future. I commend the report to the Senate.
I wish to speak about the Tax administration report as well. In leading into my remarks, I note that the previous speaker, Senator Watson, has been 27 years on the Joint Committee of Public Accounts and Audit, which is an astonishing length of service. It is one thing to be on a committee, but it is quite another to make that sort of contribution of depth, substance, thoughtfulness and sometimes, as I said the other night, even lateral thinking, which is a very valuable contribution. You will find Senator Watson’s fingerprints all over this last tax report, as you will also find mine. I am but a pup compared to Senator Watson; I have only spent 12 years on the committee. But he is right: it is the senior committee. It is a very important committee.
I would urge and hope that the Labor Party in government will indeed introduce four-year terms, preferably fixed terms, for the House. I think it is important that we introduce greater security of tenure for lower house people in particular. I have noted over my time less and less sense of belonging and attachment to and working on committees, simply because members feel so insecure that they are constantly out in their constituencies. You actually need the parliament’s work to be done from a parliamentarian’s, not just a politician’s, perspective. So I urge all the new members of the committee and all the participants in the committee to give it a full go, and I urge the government to also introduce such constitutional changes as are necessary to enable people to have the security of tenure which will allow them to give their full attention to parliamentary committees such as the JCPAA.
I want to compliment the secretariat on this committee and the new chair, Ms Grierson. This inquiry has been a drawn out, dragged out affair, partly because of the election, and it has been difficult to tie all the themes together. I must say that I was very impressed by the way it was finally done.
Overall, the committee was satisfied with the performance of the Australian Taxation Office—and do not take that as light or mild praise. The Australian tax office has advanced its abilities enormously over the last two decades. It is more able, more professional, more considerate and more efficient than it ever was. Like everyone, there is still room for improvement, but let us not say ever that we do not have a tax office that ranks with the very best internationally. It deserves credit where credit is due.
The report has 18 recommendations. Eleven apply to the tax office, five to Treasury, one to Finance and one to the parliament. The clear theme in submissions and in the evidence is that we have to get rid of the complexity which bedevils our tax system. It is neither simple nor efficient. It inhibits a broad based approach to revenue gathering. That is not the fault of the tax office; that is the fault of the parliament. Really, it is up to the parliament to say to the executive: ‘Enough’s enough. We want a simpler tax system.’ That was a clear theme.
Despite the importance of tax bills, we still find that governments take tax bills which are not presented as exposure drafts, take them to the cabinet, get them signed off and then expect their parliamentary party to march to that drum, when the very complexity and the very nature of tax legislation is such that it should in fact be in long gestation, have a great deal of consultation and be subject to thorough parliamentary review and amendment—and that does not occur sufficiently. Much tax law is rushed or waved through. As far back as 1993, the committee’s report on tax administration recognised the need for thorough consultation on tax law—I sounded like Peter Sellers when I pronounced the word ‘law’, didn’t I!—and this view is now widely held in academia as well. The committee has recommended more public consultations on tax law, more consultation before governments announce the policy intent of tax law and more exposure drafts of tax laws.
With respect to the need to lodge tax returns, compared with some countries Australia has very high rates of lodging tax returns. The rate in Australia is almost 100 per cent—I suspect it is a lot lower, because there are people who orbit right outside the tax arena. In the United Kingdom, for example, it is only 37 per cent. In New Zealand, it is only 31 per cent. That does not imply low compliance there; what it means is that you do not have to put in your tax returns—and that is a place we need to get to. Too many Australians put in tax returns, and it is not necessary. The ATO have proposed a prefilling tax return scheme. That is a good idea, but it is treating the symptoms, not the cause. You would be far better off reforming the system so that Australians pay their tax and do not have to put in tax returns because the tax is taken off at either the source of consumption or the source of income.
The committee also recognised that the end-of-year tax refund is popular in Australia. Researchers have stated that it allows people to preserve a sense of control and gives them a sense that they are getting their fair share back in the form of a refund, so that complicates matters. Some people, including me, like to put in a tax return and get a rebate. It is a nice little human characteristic. And then, every now and then, they give you a thump, and you do not get a rebate; you have to pay more in.
The advantages of removing the need to lodge a return for many taxpayers would be saving billions of dollars annually in compliance costs. Further, the constant growth in deductions poses a potential threat to the tax base. Tax expenditures are a less transparent way of distributing public funds than direct appropriations. Indirect outlays are confusing and making complex our system. I hope that, when my own report into budget transparency comes down and you read that in conjunction with the Auditor-General’s reports, you will note a belief that our tax expenditures indirect outlay system needs to be radically reformed as well. The committee recommended that the government’s comprehensive tax review, Australia’s Future Tax System, known as the Henry review, investigate this issue.
We had a brief look at the New Zealand system, and we received evidence about the simplicity of some aspects of the New Zealand system, particularly in relation to fringe benefits tax. The New Zealand approach is efficient because it targets the main expenditure areas in fringe benefits tax, such as cars, low-interest loans, and free or subsidised goods and services. Australia took the other, more complicated path of capturing all expenditure areas and then legislating for exemptions. We spend a lot of time in Australia trying to comply on the small-ticket items, such as car parking. The committee recommended that the government examine in the review whether Australia should harmonise some of its business taxes with New Zealand’s simpler system, in line with the approach we already carry out on the economic front for closer economic ties and common laws and practices. One possible spin-off from this is that it might encourage uniform businesses taxes in the broader South Pacific area and lead to a uniform economic zone. I note with interest the Prime Minister’s aspirations in that area.
The committee was well served by external scrutineers during the inquiry. The most important of those was the Audit Office. The Audit Office has published a number of useful reports on the tax office and Treasury recently, including on tax debts in microbusinesses; tax havens; the taxpayers charter; data matching—wow, are they good at that now!; the tax expenditure statement; high-risk income tax refunds; and self-managed super funds. The Inspector-General of Taxation is another who has been put through his paces. He has finalised important reports into GST audits, potential revenue bias in private rulings and R&D syndicates. The Taxation Ombudsman, which is part of the Ombudsman’s office and was created out of a recommendation by the Joint Committee of Public Accounts and Audit in 1993, also assisted the committee during the inquiry. All three external scrutineers gave an independent and different perspective on the tax office, but all of them have respect for our tax office. All three agencies helped the committee arrive at its conclusions, and obviously there are acknowledgements for all those who have contributed to this report. This, I think, is the committee’s major tax administration report of the last decade. I hope that both the parliament and the government take due note of its recommendations.
Question agreed to.