The Coalition Government has announced a “Cutting Red Tape” initiative. It proposes to cut 9,000 regulations which it claims will reduce compliance costs by $1 billion every year. Its first initiative so far has been the introduction of the Omnibus Repeal Day (Autumn 2014) Bill into parliament which aims to amend or repeal unnecessary legislation.
This is a positive initiative, but how is the Government progressing in respect to tax compliance? Well the Mills Oakley Tax Compliance Index will be the judge of that! In this month’s edition of The Tax Storey I have the stats for the first two quarters since the Coalition government was elected in September last year. The verdict? Well, so far pretty good.
Just to recap, the Mills Oakley Tax Compliance Index (the Index) measures the amount of new tax related legislation, regulations, ATO binding rulings and decisions and the equivalent for each State and Territory. The Commonwealth Government is by no means the sole source of tax rules, but the legislation and regulations introduced by the Government, and its general policy settings and attitude to tax, definitely plays the biggest role.
Graph A (above) shows the number of new rules each month for the past 12 months. It definitely seems to be trending down or is at least flat since September last year. Graph B (below) shows the year on year change between the December quarter 2013 v December 2012 and the March quarter 2014 v March 2013. It definitely shows a decrease in the tax rules under the Coalition, markedly so in the December quarters, 742 v 2,565.
It’s too soon to judge if this is a trend or just a blip. Stay tuned and I’ll let you know!
It’s not just the volume of legislation that contributes to tax compliance, but how it is made. A huge source of headaches for tax advisers and their clients is announced but unenacted legislation. This is particularly problematic when the effective date that the legislation will apply from is announced to be retrospective, typically the date of the announcement itself.
A shocking example in recent years was the announcement by the former Government on 1 March 2012 that the tax anti-avoidance rules, “Part IVA”, would be amended, effective from the date of the announcement. There was no draft legislation accompanying the announcement, and only a vague description of what the change would entail. Part IVA is a very broad tax anti-avoidance rule and can impact on a large range of transactions. Many taxpayers seek a private ruling from the ATO, or at least a legal sign off, on Part IVA before implementing a transaction. The announcement effectively put many transactions in lockdown until draft legislation was released months later.
The irony was that once the draft legislation was released the then Government also announced a deferral of the start date until the date the draft legislation was released. Effectively this meant that the previous months of confusion was entirely unnecessary.
Putting aside the confusion and compliance costs, introducing legislation in this way causes a more fundamental issue, a democratic one. Announcing a retrospective start date assumes the law can be enacted, or enacted without amendments. If a party controls both houses of Parliament, this might be acceptable, but it has been some time since that was the case. Proposed changes are frequently blocked by the Senate, leaving taxpayers (and the ATO) in a limbo land where the Government has announced a change with immediate effect, but it is not yet supported by any law. Likewise, the current Government recently rejected a raft of announced but unenacted legislation proposed by the previous Government.
This issue has gotten so bad that the current Government recently announced the introduction of a proposed law that would offer protection to taxpayers if they relied on the announcement and now find their tax position to be wrong. This is a positive move but it would be even better if this practice was abolished altogether. We’ll see how the new Government goes this budget night, a prime time to make tax announcements.
A huge tax compliance headache, especially for small and medium businesses, is Division 7A. Division 7A aims to prevent exploitation of the 30% company tax rate by the owners of a company, which may pay tax at a higher rate (currently the top rate is 46.5%). Division 7A taxes as a dividend some loans, payments and forgiven debts when those transactions are with shareholders of the company, or their associates. The policy reasons for Division 7A may be sound, but its practical implementation is horrendously complex.
Division 7A is currently under review by the Board of Taxation which has recently released a discussion paper. Two of the suggestions are worth mentioning. First, under the current rules loans will be exempt from Division 7A if there is a written loan agreement which specifies a benchmark interest rate and sets a maximum term (7 years for unsecured loans and 25 years if secured by real estate). The Board considers that this arrangement is distorting as it favours “passive” investments. The Board proposes that all loans must have a maximum 10 year term at a higher interest rate. This might change the common practice of using corporate profits as an internal “bank” to fund real estate investments by a related family trust. This structure is popular because family trusts can claim the 50% CGT discount. If the company invests in real estate directly, it misses out on this concession.
Another measure that will affect property investments is the proposed “tick the box”. A structure that was common for years was for a business or other income earning investment (shares, real estate) to be held by a family trust (thus qualifying for the 50% discount) and for the trustee to distribute its income to a “bucket” company (thus capping tax at 30%). Often the distribution was not immediately paid and was retained as either working capital or to fund new investments of the trust. ATO changes a few years ago put this structure in doubt as they argued it breached Division 7A. The Board of Taxation proposes allowing this structure if the trust and company make an election – “tick the box”. What’s the catch? The trust will no longer qualify for the 50% discount except for any business goodwill. If enacted this change would mean “bucket” companies would remain an effective tool for funding business working capital, but may not be suitable to fund passive investments.
These are just proposals and who knows what Division 7A will look like in the future. I have my own views on how to simplify it. Stay tuned to the next edition to find out more!
I will be presenting at the Victorian CPA Conference in Lorne on Friday 23rd May 2014. My topic is the CGT small business concessions. If anyone is attending, I hope to see you there!