Response to Regulation Impact Statements (RISs) and Compliance Costs

Background

In 1996 the ATO with the approval of government, implemented the Joint Committee of Public Accounts “JCPA” (1993-94)² recommendation that tax legislative change be accompanied by a Taxation Impact Statement. We developed guidelines for the preparation of compliance cost impact statements which were applied as part of our legislative processes. These guidelines were subsequently modified to meet the new whole of commonwealth government requirements below.

The government’s regulation review & reform policy, announced by the PM in ‘Time for Business’ (November 1996), produced a requirement to prepare a Regulation Impact Statement (RIS) for any regulatory proposal affecting business. As a result RISs are now prepared in relation to commonwealth legislation.³ The responsibility for clearing RISs rests with Office of Regulation Review (ORR), part of the Productivity Commission.

The ORR produced a guide to assist in the preparation of RISs titled “A Guide to Regulation” (2^nd edition Dec 1998). It is available on their website (www.pc.gov.au/orr).

Following the JCPA recommendations the ATO sponsored an independent study of taxation compliance costs.⁴

Benefits of tax RISs

Page 42 of Time for Business states that tax RISs “should assist the Treasury and the ATO in identifying areas of significant compliance burden and ensure that any changes are practical and workable”. Listed below are 2 key benefits of tax RISs:

1. Where a tax RIS accompanies a cabinet/ministerial submission it gives decision makers an opportunity to consider compliance costs or benefits when making a decision about a new tax measure.
2. A RIS is a public statement of the compliance impact of a new tax measure. It is attached to the explanatory memorandum tabled in Parliament by the government when a tax bill is introduced.

Tax RISs - special rules

Tax RISs have certain exemptions from the guidelines that apply to RISs prepared for other commonwealth regulations (chapter B of the ORR RIS guidelines). These exemptions arise from the commercial sensitivity of tax measures which often makes public consultation on compliance impacts a more difficult exercise than other commonwealth regulations. However, the recommendation of the Business Tax Review to have a forward work program may impact on current arrangements.⁵

Key Steps in the Preparation of a Tax RIS
(developed with guidance of ATAX, UNSW)

The ATO has prepared its own guidelines for its staff to use when preparing RIS: “ATO guidelines for the preparation of Regulation Impact Statements” September 1998. The guidelines detail the steps an ATO officer follows when preparing a RIS. They can be summarised as follows:

1. specify the policy objective;

For example, the GST RIS states that the policy objective is the introduction of a broad-based GST at a rate of 10% commencing from 1 July 2000.

2. identify the implementation options;

For example, the GST RIS identifies the following implementation options for the introduction of the GST.

• introduction of transitional measures and concessions (It was considered that the introduction of a GST without these might disrupt economic activity.)
• $500m assistance to small business (This option was designed to enable businesses to up-grade their record keeping capacity so as to improve the financial information available to them and to reduce the compliance impact of the GST).
• information/eduction program (A comprehensive program was chosen to inform taxpayers of their obligations and enable a high level of voluntary compliance on the implementation of a GST.)
• returns and remittances (The option chosen was for returns and remittances to be integrated into a single return and payment or refund under the Pay As You Go (PAYG) system. Electronic payment and lodgment options are also available.)
• time of supply rules (Here the government selected to attribute supply to the earlier of invoice or payment rather than the earlier of invoice, payment or delivery. One rationale for this was that the approach was consistent with the way business normally operate, and the alternative was likely to increase compliance costs in determining at what stage a taxable supply occurred.)
• tax inclusive
• consultation

3. assess the impacts (costs & benefits) of each implementation option;

The ultimate choice of options adopted in relation to the GST were heavily influenced by their compliance cost impacts.

4. impact group identification (who is subject to the measure);

For GST the groups affected were Business (categorised as quarterly remitters, monthly remitters, exporters and importers, charities and voluntary remitters) and Government Entities

A more specific example of impact group identification is provided in the RIS accompanying legislation dealing with fringe benefits tax (FBT) reporting on group certificates⁶:

“Around 81,000 employers lodged FBT returns in the 1997-1998 FBT year, and an estimated 23,000 employers currently provide benefits which are exempt from FBT under sections 57A or 58 of the Fringe Benefits Tax Assessment Act 1986 (for example, public benevolent institutions or live in residential care workers). Employers will be required to calculate the taxable value of fringe benefits provided in respect of each employees employment, and where the amount exceeds $1,000, include the grossed-up amount on the employees group certificate.”⁷

5. cost of compliance (quantitative/qualitative);

• initial costs (For example, the GST RIS concludes that the cost of complying with the GST will be marginal for most business because the compliance requirements are for the most part the same as existing income tax and accounting requirements. Compliance costs would however be higher where business sold a mix of GST free⁸ and fully taxed goods, or a mix of input taxed⁹ or fully taxed services.
• recurrent costs (The net compliance cost estimate provides a more accurate reflection of the recurring costs of the GST. This is because it takes into account:
• the removal of the wholesale sales tax;
• the abolition of State taxes;
• cash flow benefits to remitters; and
• the amount recouped by business through tax deductions.)
• deductibility of compliance costs (which is not available for exempt bodies/government)
• time required to make changes (estimate)
• cost of that time (staff hourly rate – type of staff required to make change; ie. clerical, accountants, computer operators)
• automation or manual change to system for recurrent costs

6. cash flow benefits/costs;

For example, the GST RIS describes the cashflow impacts arising from the GST’s payment arrangements as follows:

“Payment arrangements are an important element in determining the compliance costs or benefits accruing to a firm. Where a business is able to secure payment and hence collect GST before the tax liability falls due, they enjoy a cash flow benefits.”

This is consistent with research studies by Sandford & Hasseldine¹⁰ that GST type taxes produce in aggregate cash flow benefits. The GST RIS quantified cash flow benefits to be $200million.

7. administrative costs - for government (In relation to the GST, administrative costs were estimated in relation to both the ATO and the Australian Custom Service.);
8. economic costs (In relation to GST, these were developed by Treasury); and
9. conclusion and recommended options. (These usually appear in RISs but were not included in the GST RIS. The RIS associated with the fringe benefits tax reporting measure illustrates this aspect of a RIS. It concluded and recommended that there was only one feasible option (in terms of cost and complexity of the tax law) for implementing the Government’s proposal. Hence, from the 1999-2000 FBT year, employers will be required to report the grossed-up taxable value of certain benefits on employee group certificates.)

Tax RISs – relevant documents

The ATO/Treasury is generally required to attach a RIS when they prepare one of the following:

• a cabinet submission;
• an explanatory memorandum; and
• letters to the PM or other ministers (less commonly).

When should RIS be prepared:

A RIS is prepared for tax measures that impact on taxpayers/businesses by imposing costs or creating benefits, or by restricting competition. The Treasury and the ATO consult with the ORR on a case by case basis if there is any doubt as to whether a RIS is required.

The following flowchart describes the process typically followed when the ATO prepares a RIS.

The last box is significant because ultimately RISs are government documents. Nevertheless a political process that allows consideration of compliance costs, and which allows some of these considerations to be transparent is to be preferred to the more obscure process that existed in Australia prior to 1996.

General ORR feedback to the ATO

ORR is generally satisfied with RISs produced by the ATO. They have suggested, the following improvements:

• a wider range of implementation options (or why not);
• a more comprehensive list of costs & benefits;
• a qualitative description of compliance costs where quantification is not possible; and
• greater emphasis on the impact on small business.

Possible improvements to tax RISs

A possible improvement to tax RISs would be to make them public before the introduction of the legislation. For example, the RIS that accompanied a cabinet or ministerial submission could be released to the public in draft form immediately following the public announcement of the decision. A revised version which could take into account the benefits of wider consultation could also be issued as part of the explanatory memorandum when the legislation is introduced. This would be consistent with statements made on page 43 of Time for Business that “broad consultation with small business may not be possible prior to announcement, but consultation should occur as part of subsequent development of administrative arrangements”. We have referred this suggestion to ORR.

As it is generally accepted that compliance costs are regressive for small business – a focus similar to the small business litmus test in the United Kingdom¹¹) seems appropriate. This is also consistent with the ORR feedback above.

More fundamentally, the quality of RISs often depend on the level of consultation with relevant stakeholders on legislative proposals.

The government gave a commitment in “Tax Reform not a new tax, a new tax system”¹² for ongoing and targeted consultation to ensure successful implementation of its tax reform agenda. As a consequence, significant consultation has and is occurring on the reform measures. It is likely that consultative processes will continue to be encouraged for the future.

In this context for example, the Review of Business Taxation recommended the development of an integrated tax design process which emphasised the need for extensive ongoing consultation:

“The Review is strongly of the view that it is imperative that this process (of public consultation) should be a continuing feature of the ongoing taxation system.”¹³

Such consultation will be able to enhance the quality of tax RISs.

We also agree with the Review’s belief

“that an effective tax system can only be maintained over time on the basis of cooperation between taxpayers and the tax administration. The foundation of such cooperation must be effective and ongoing consultation on all aspects of the tax system.”¹⁴

RIS are currently historical documents and are not updated to monitor either their accuracy or ongoing and unanticipated compliance costs of legislative measures. There may be benefit in periodic reviews of RISs to ensure that policy makers are aware of the ongoing compliance costs associated with legislative requirements.

B. Government Time Box Policy