Second Reading Speechby the Minister assisting the Treasurer the Hon. Peter Baldwin MP
I move that this Bill be now read a second time.
A major element of the Government's reform agenda since taking office has been the comprehensive reform of the Australian taxation system.
When this Government took office in 1983, there was a widespread view that the Australian income tax system operated unfairly. In 1985 the Government introduced major business and personal tax reforms which addressed a large number of longstanding flaws in the tax system. The Government has continued to build on these reforms with the objective of making the tax system fairer and more efficient. The 1988 business tax reforms further encouraged economic efficiency. Since 1985, the Government has developed a comprehensive system for taxing foreign source income and there has also been reform in such areas as superannuation and depreciation.
Unquestionably, the tax system is now one of the fairest and most secure in the world, however reform does not end there. The Government is committed to ensuring that the Australian tax system continues to meet the community's expectation of fairness, certainty and efficiency at the highest possible level.
In the context of the study of options for simplifying the income tax system, announced on 15 February 1990, the Government decided on a major overhaul of the present self assessment system of taxation.
Australia has had a self assessment system of taxation since 1986. This Bill will provide real benefits for taxpayers by making the system fairer and more certain.
This Bill implements the Government's decision, announced in the Treasurer's statements of 13 December 1990 and with the 1991-92 Budget, to improve existing self assessment arrangements.
The Bill proposes changes to the law to:
- introduce a new system of binding Public Rulings applicable to income tax, withholding taxes, franking deficit tax, Medicare levy and fringe benefits tax;
- introduce a new system of binding Private Rulings for completed or proposed transactions or arrangements. The new system will apply to rulings dealing with income tax, withholding taxes, franking deficit tax, Medicare levy and fringe benefits tax;
- introduce a new system of reviewable Private Rulings which will allow taxpayers to have unfavourable Private Rulings reviewed by the Administrative Appeals Tribunal (AAT) or court (subject to there being no assessment which covers the matter dealt with by the ruling);
- limit objection rights against an assessment to avoid duplication by preventing a further review of a matter that is the subject of an objection against a Private Ruling;
- extend the period within which a taxpayer can object against an assessment from 60 days to 4 years, and provide a similar objection period for Private Rulings;
- allow the Commissioner of Taxation to rely on statements made by the taxpayer in a request for an amendment;
- introduce a new system of penalties for understatements of income tax liability. The penalties will be based on the requirement that taxpayers exercise reasonable care in carrying out their tax obligations. A more rigorous standard, the reasonably arguable position test, will apply to items which affect tax by more than $10 000;
- introduce a new interest system for underpayments or late payments of income tax, based on commercial principles and market interest rates;
- reduce late payment penalties to take into account the new interest system. This will allow for the separation of interest and penalties while providing an incentive for taxpayers to pay income tax on time;
- provide deductibility to all taxpayers for interest payments made to the Australian Taxation Office (ATO); and
- remove, in most cases, the requirement for taxpayers to lodge notices of elections or other notifications with the Commissioner.
In determining the final form of the changes the Government, through the ATO, has consulted extensively with taxpayer and tax professional representative bodies.
In responding to concerns expressed about current self assessment arrangements by these representative bodies, the Government released the consultative document 'A Full Self Assessment System of Taxation' as part of the Treasurer's Tax Simplification statement of 13 December 1990.
Following careful consideration of the submissions and extensive consultation with interested parties, the Government summarised the broad features of the proposed measures in the August 1991 information paper 'Improvements to Self Assessment - Priority Tasks'. The Government again showed its commitment to a consultative process by agreeing to continue consultation on the technical details.
The Bill represents the outcome of that process.
The measures contained in the Bill will apply from the later of the date of Royal Assent or 1 July 1992.
I now turn to a more detailed discussion of the measures.
Taxpayers who are genuinely uncertain about the tax effect of a completed or proposed arrangement will be able to seek a Private Ruling from the Commissioner. The Commissioner will be bound by the ruling to the extent that the tax that would be payable by the taxpayer will be reduced to reflect the tax that would be payable under the ruling.
The Commissioner will continue to issue Public Rulings. These will be binding in the same way as Private Rulings will be binding on the Commissioner.
The Commissioner will only be able to withdraw the benefit of a ruling on arrangements that have not yet been entered into, except where it would be grossly inequitable to allow a taxpayer to continue to benefit from an incorrect ruling.
A taxpayer will be able to have an unfavourable Private Ruling, even on a proposed arrangement, reviewed by the AAT or courts. When the review process is finalised, the decision of the AAT or court will be legally binding and conclusive as to the application of the ordinary provisions of the legislation to an actual arrangement not relevantly different from the proposal or arrangement to which the Private Ruling related.
Taxpayers will be able to object against a Private Ruling within the later of:
- 60 days after receipt of the ruling; or
- 4 years from the due date for the lodgment of the relevant return.
The new system of binding and reviewable rulings will promote certainty for taxpayers, and thereby reduce their risks and opportunity costs. The new system will also be fairer because taxpayers will be able to object to Private Rulings and have the matter reviewed by an independent tribunal or court.
The Bill extends the period within which a taxpayer can object against an assessment from 60 days to 4 years, and, as I mentioned above, provides a similar objection period for Private Rulings. The 4 year objection period corresponds with the Commissioner's power of amendment. These changes represent enhanced rights of objection and appeal for taxpayers.
Taxpayers will have full rights of review either against the Private Ruling where there is no assessment, or against the assessment, except to the extent that the taxpayer has already objected against a matter in respect of a Private Ruling. By allowing taxpayers to object to Private Rulings the Bill provides the opportunity to bring forward in time the resolution of matters in dispute.
The Commissioner will be able to rely on statements made by the taxpayer in a request for an amendment in amending the taxpayer's assessment in the same way as the Commissioner can now rely on statements made by the taxpayer in a return when making an assessment. However, the Commissioner may decide not to accept statements in the request for amendment or made elsewhere and, for example, make enquiries as to whether the amendment is necessary.
The Commissioner is obliged to amend the taxpayer's assessment where the Commissioner is satisfied that the amendment is necessary to reflect the correct tax.
Where a taxpayer self amends the Commissioner will have 4 years to review the item amended.
These changes will provide opportunities for efficiency gains in the administration of the income tax law by reducing duplication of work where it does not add value.
The key features of the new penalty provisions are:
- all taxpayers will be required to exercise reasonable care in conducting their tax affairs. Failure to exercise reasonable care will attract a penalty of 25% of a tax shortfall or franking tax shortfall caused by the failure;
- taxpayers with large claims (generally $10 000 tax or more) will, in addition, be required to ensure that the positions they adopt are reasonably arguable. Failure to have a reasonably arguable position will attract a penalty of 25% of a tax shortfall or franking tax shortfall caused by the failure;
- a taxpayer who has received a Private Ruling from the Commissioner on a matter but does not follow the ruling when preparing the return will also be liable to pay a penalty of 25% of a tax shortfall or franking tax shortfall caused by not following the ruling;
- taxpayers who behave recklessly with regard to their tax affairs, or who set out to deliberately evade tax will also be penalised (at 50% and 75% respectively) in respect of any tax shortfall or franking tax shortfall caused by their behaviour;
- taxpayers who enter into arrangements for the sole or dominant purpose of avoiding tax will be liable to pay penalty of 50% of a tax shortfall caused by the arrangement, reduced to 25% if the position taken by the taxpayer is reasonably arguable. This will be so, irrespective of the provision of the Income Tax Assessment Act used by the Commissioner to defeat the arrangement.
- understatement penalties may be increased by 20% of the penalty if there are aggravating circumstances, for example, a taxpayer hinders the Commissioner's enquiries, or decreased by 20% of the penalty if the taxpayer discloses a tax shortfall or scheme to the Commissioner during an audit;
- taxpayers who voluntarily disclose a tax shortfall or scheme to the Commissioner before the Commissioner enquires into the taxpayer's affairs will have the penalty reduced by 80%;
- understatement penalties will be subject to the Commissioner's discretion to remit the penalty in whole or in part;
- understatement penalties will be subject to full review rights.
The whole idea of the new understatement penalties is to ensure that people do not get penalised when they have made an honest and genuine attempt to correctly determine their taxable income. The Bill replaces the existing system where penalty is automatically attracted at the rate of 200%, and remitted at the discretion of the Commissioner. In so doing, it reduces the risk of penalties for taxpayers provided taxpayers adhere to the standards of reasonable care and, where appropriate, reasonably arguable position.
The reasonable care standard requires a taxpayer to exercise the care that an ordinary person would be likely to have exercised in the circumstances of the taxpayer. Reasonable care requires taxpayers to make a reasonable attempt to comply with their tax obligations. The effort required is commensurate with all the taxpayer's circumstances, including the taxpayer's knowledge, education and skill.
The Government has opted to favour equity in this area by choosing a standard which has regard to the taxpayer's circumstances. However, following experience in the United States, the Government considers it appropriate that a more rigorous standard apply where the item at issue is very large (eg., generally more than $10 000 in tax). Where the interpretation of the law for such large items is in issue, we expect taxpayers to exercise more care. That is the taxpayer must have a reasonably arguable position on the matter.
The reasonably arguable position standard will, because of the $10 000 threshold, apply only to relatively few taxpayers. The crux of the standard is that taxpayers should not take positions at law which, at the time taken, are not about as arguable as an alternative position. All said and done, the standard is about analysing the law and its application to the facts. If there is a strong argument to support the taxpayer's position, that may be enough. However the Government does not want taxpayers to take positions which are not defensible or which do not have reasonable prospects of success.
Where a taxpayer perceives a serious risk that the taxpayer's preferred position may not be reasonably arguable, the taxpayer is able to seek a Private Ruling from the Commissioner.
While the Bill provides a set of rules and accompanying penalties, there may be cases that will not fit neatly into a category of behaviour, or for which the prescribed rates of penalty are inappropriate. For this reason, and as a result of the consultative process, the discretion which the Commissioner has to remit penalties is not removed by this Bill. The Commissioner will retain the flexibility to provide concessional treatment where it would be fair and reasonable to do so.
As a result of the consultative process, the Government agreed in the August 1991 information paper to put on hold the proposal in the December 1990 consultative document that there should be tax agent penalties. A review is in course to determine, amongst other things, whether tax agent penalties or some other form of regulation of tax agents is appropriate, and if so, the level of those penalties or the form of regulation.
Pending the outcome of that review, and as an interim measure to protect the Revenue, the Bill maintains the current position that a taxpayer is liable to penalties for understatements of tax caused by the negligent or delinquent behaviour of the tax agent in dealing with the taxpayer's affairs. However, a taxpayer who is liable to penalty in these circumstances is able to sue the tax agent to recover both penalty and interest.
The penalty for late payment is to be reduced from the current 20% per annum to 10% per annum, but will be complemented by the new interest system. The reduced late payment penalty, together with the new interest system, should ensure that the Revenue is not used as a financing vehicle. It also provides an effective reduction in the level of late payment penalties for most taxpayers.
By reducing the penalty, and introducing the new interest system, the Bill will allow for the separation of penalties and interest so that they can be applied separately as appropriate to the circumstances of each case. It also allows for a more commercial approach to be the payment of tax.
This penalty does not apply to debit amendments other than late payment of the increase in tax. Like other penalties, the Commissioner will have the power to remit the penalty in whole or in part.
The Bill will provide for interest to be paid by taxpayers in relation to the underpayment of tax, including debit amendments, and the late payment of tax. Interest will apply irrespective of whether a taxpayer is subject to understatement penalties.
The basis of the interest system is to compensate the Revenue for the time value of money for the period in which it is denied the use of funds.
To reflect a more commercial approach to the payment of tax, the statutory interest rate is based on market rates. The rate of interest payable by taxpayers will be set by reference to the weighted average yield for the 13 Week Treasury Note tenders plus 4%. The extra 4% reflects administrative costs and the fact that most taxpayers would not be able to borrow at the 13 Week Treasury Note rate.
Given that interest is meant to compensate the Revenue for the time value of money, the rate at which interest is to be paid by taxpayers will be varied periodically to reflect interest rate movements in the market.
The Commissioner will have the power to remit interest.
In effect interest at the 13 Week Treasury Note rate plus the 4% would make most taxpayers indifferent to borrowing from a bank to pay tax or being liable to the interest at that rate. The late payment penalty encourages taxpayers to pay tax on time.
As a result of the consultative process, interest paid by taxpayers to the ATO will be tax deductible. This will remove the present lack of symmetry in the tax treatment of interest paid by taxpayers to the ATO and interest paid by the ATO to taxpayers.
It is estimated that the new interest system, (including reduced late payment penalties and deductibility for interest payments made by taxpayers to the ATO) will cost the Revenue $20m in 1993-94 and $64m in 1994-95 and subsequent years. However, the actual cost to the Revenue in any year will depend on the interest rates prevailing in the particular period. These costs could be higher or lower depending on whether interest rates are higher or lower than current market rates.
In most cases taxpayers will no longer be required to prepare and lodge written notices of elections. However, the taxpayer's records will need to reflect the decisions taken in calculating the taxable income.
The August 1991 information paper foreshadowed other amendments to the taxation laws. These amendments are not yet finalised and will be included in a separate Bill to be introduced later this year.
The Government believes these measures to be genuine tax reform which will improve the current self assessment system of taxation.
I present the Explanatory Memorandum which contains more detailed explanations of the provisions of the Bill.
I commend the Bill to the House.