Explanatory Memorandum(Circulated by authority of the Treasurer,the Hon. Peter Costello, MP)
Chapter 1 - About the Tax Law Improvement Project and progressive delivery of the new law
This chapter provides background information on the Tax Law Improvement Project and explains that the Income Tax Assessment Bill 1996 is the first instalment in the rewrite of the Income Tax Assessment Act 1936 .
This chapter discusses in general terms:
- the role of the Tax Law Improvement Project
- problems with the structure and expression of the existing law
- how the new law will deal with those problems
- how the new law will be introduced progressively.
In November 1993, the Joint Committee of Public Accounts published a report recommending the setting up of a broadly based Task Force to rewrite the income tax law. In the following month, the Tax Law Improvement Project was established.
This is a project to restructure, renumber and rewrite in plain language Australia's income tax law. It aims to improve taxpayer compliance, and reduce compliance costs, by making the law easier to use and understand.
Opportunities are being taken to make minor content changes to aid the rewriting. These can reduce or eliminate unnecessary complexity in the law, and bring the law closer into line with administrative and commercial practice.
For many years, the income tax law has been criticised as being too difficult to read and understand. When the Income Tax Assessment Act 1936 was introduced, it was under 100 pages long. Now, it is some forty times longer. Sixty years of constant change has produced a body of law that no longer meets the needs of its users in terms of being convenient and reader friendly.
Originally, the structure of the existing law was a logical arrangement of the sections. Adding so much more law over the years has made it difficult for readers to find their way around the Act. The Act no longer has a readily discernible structure.
The Income Tax Assessment Bill 1996 proposes a new structure, one which will reintroduce a logical arrangement of material. As a result, the law will be easier to follow and use. As well, the new structure should be flexible enough to continue to meet its readers' needs even when the law is substantially amended in the future.
The proposed new structure is discussed in greater detail in Chapter 3.
The sheer volume of amendments to the existing law has overloaded the numbering system, so that the Income Tax Assessment Act 1936 included section numbers such as 159GZZZZH. Numbers like this confuse and disorient taxpayers and their professional advisers.
Numbering problems also arise from limitations in the existing structure of the law. Most new law affecting liability to tax is inserted within a narrow band that is already crammed.
Renumbering the law using the existing numbering system would not of itself provide sufficient flexibility to avoid the same problem arising again. Consequently, the Bill adopts a new numbering system that has been designed to accommodate future expansion.
The proposed new numbering system is explained in Chapter 3.
The expression of the income tax law has become a patchwork of different styles. It cannot be easily read and understood. Many professional advisers have come to rely on explanatory materials prepared by government or commercial organisations, and largely ignore the statutory expression.
There is an unnecessary cost if wasteful amounts of time must be spent just understanding what the law says. Anything that reduces this effort should help to reduce compliance costs.
If the law can be more easily understood by a wider range of people, then compliance with the law should also improve.
The new law will be drafted using plain and clear language, even when dealing with the most difficult concepts.
The language of the new law has been designed for the widest professional audience. The law should be capable of being understood by all who need to read it, not just by the courts and the most expert professional advisers. The rewritten law should open itself up to all professional tax practitioners.
There are very few individual taxpayers who read, or need to read, the income tax law. The new law does not have to be written so that it can be understood by all taxpayers. It is impractical to do so. However, it is appropriate that special care be given to those provisions which most directly affect the millions of individual taxpayers. These provisions must at the very least be capable of being communicated by those whose job it is to advise individual taxpayers about their rights and obligations.
In order to make that task easier, where the new law applies to individual taxpayers it will address the reader directly. For example, you must lodge a tax return rather than a taxpayer must lodge a return . This approach was used in the Tax Law Improvement (Substantiation) Act 1995 . Two important benefits flow from this change.
Using a style familiar to most people will make the law less intimidating, more directly engaging and ultimately, accessible by a wider audience. It captures the reader's attention more immediately, focusing attention on what they need to do to comply with the law. This helps people make personal sense of the law.
It will also help those who need to explain the law, and will reduce the potential for errors. Direct address simplifies the text. It supports proven methods of improving a reader's ability to understand documents (eg. by using active rather than passive tense and using action verbs). Tax advisers and educators should be able to use the words of the law directly when explaining people's rights and obligations.
The way in which the present law is presented can be as important to comprehension as its text and structure. The Bill makes important advances in this area. The use of extra white space, both in the margins and before each paragraph, and the addition of running headings to facilitate reader orientation, are among the more obvious improvements made by the Bill.
The income tax law is considered too large to rewrite and enact in a single stage. The Income Tax Assessment Bill 1996 is founded on the basis that the old law will be rewritten and replaced progressively.
It is proposed to enact the rewritten law in annual instalments. The first instalment comprises the Bills in this package, in particular the Income Tax Assessment Bill 1996. It is to apply first for the 1996-97 income year.
From the commencement of this package of Bills until the completion of the rewrite, the income tax assessment law will be spread over two Assessment Acts - the Income Tax Assessment Act 1936 and the proposed Income Tax Assessment Act 1996 .
As each instalment of the rewritten law starts to apply, the corresponding provisions in the 1936 Act will cease. The proposed new Act will grow progressively and the operative provisions in the 1936 Act will correspondingly shrink. When the final instalment of the rewritten law starts to apply, the 1936 Act will have no ongoing operation.
During the transition period, the two Assessment Acts will work together. You will refer to them to determine your taxable income and your income tax liability (taking into account the tax rates set out in the Income Tax (Rates) Act 1986 ).
To reflect this, the term 'this Act' will be defined in both Acts to mean the 1936 Act, the proposed 1996 Act and the objection, review and appeal provisions of the Taxation Administration Act 1953 (so far as they relate to the other 2 Acts).
Readers of the income tax law will be able to start at the beginning of the proposed 1996 Act. Signposts will direct them into the New Act, or to the 1936 Act, where appropriate. For example, checklists of operative provisions about assessable income, exempt income and deductions will guide readers to provisions in both the 1936 Act and the proposed 1996 Act. Similarly, many operative provisions in the Income Tax Assessment Bill 1996 signpost readers to relevant provisions in the 1936 Act.
When a provision in the 1936 Act ceases to apply because it has been rewritten, the Income Tax (Consequential Amendments) Bill 1996 will insert a note after the old provision signposting readers to the corresponding provision in the new law.
Definitions in the Dictionary to the Income Tax Assessment Bill 1996 apply only to that Bill, and not to the Income Tax Assessment Act 1936, unless the 1936 Act expressly says otherwise [clause 995-(2)]. Conversely, definitions in the 1936 Act will not apply to the 1996 Bill, unless expressly adopted. (Chapter 11 of this Explanatory Memorandum explains how this Bill proposes to deal with defined terms.)