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Outline of presentationOutline of presentation

Part A: Four instances for benefitPart A: Four instances for benefit

Part B: Observations on the four Part B: Observations on the four instancesinstances

Part C: What benefits arise?Part C: What benefits arise?

Part D: Reform alternatives to TVMPart D: Reform alternatives to TVM

Part E: Future actionsPart E: Future actions

Part F: SummaryPart F: Summary

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Assumptions for presentationAssumptions for presentation Presentation focuses on outcomes Presentation focuses on outcomes

and benefits sought from TVM, plus and benefits sought from TVM, plus reform alternatives and reform reform alternatives and reform actionsactions

Presentation assumes that a case has Presentation assumes that a case has been made for reform of the income been made for reform of the income tax system tax system (“The Essential Thesis”)(“The Essential Thesis”)

Presentation assumes operation of Presentation assumes operation of TVM is understood (“The TVM is understood (“The Mechanism”)Mechanism”)

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Part A:Part A:Four instances for Four instances for

benefitbenefit

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CGT: No regime required!CGT: No regime required! TVM TVM automaticallyautomatically brings all capital brings all capital

gains and capital losses to accountgains and capital losses to account Only need rules for 50% discount, small Only need rules for 50% discount, small

business concession and capital lossesbusiness concession and capital losses TVM reduces CGT law. So far,TVM reduces CGT law. So far,

126 pages 126 pages 29 pages 29 pages 39 CGT events 39 CGT events 2 events (likely) 2 events (likely)

Why?Why? Net income calculation captures gain/lossNet income calculation captures gain/loss

on all assets/liabilitieson all assets/liabilities

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CGT: Predicted administrative benefitsCGT: Predicted administrative benefits Estimated administrative and Estimated administrative and

compliance improvements could be:compliance improvements could be: 51% reduction in CGT related rulings51% reduction in CGT related rulings 32% reduction in CGT related litigation32% reduction in CGT related litigation 180,000 fewer phone calls to ATO p.a.180,000 fewer phone calls to ATO p.a. 19,000 fewer requests for amendment 19,000 fewer requests for amendment

p.a.p.a. 15,000 fewer letters p.a.15,000 fewer letters p.a. 770 fewer objections p.a.770 fewer objections p.a. 800 fewer private binding rulings p.a.800 fewer private binding rulings p.a.

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Myer EmporiumMyer Emporium

MyerEmporium

MyerFinance

Citicorp

1. $80m loan

2. interest12.5% p.a.

3. $45.4massignment fee

4. Interestpayments

5. $80m loan repayment

Facts:

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Myer EmporiumMyer Emporium under current law under current law Lower courts:Lower courts:

$45.4m not taxable, so$45.4m not taxable, so Parliament added new income Parliament added new income

alienation rulesalienation rules Then High Court:Then High Court:

$45.4m taxable to $45.4m taxable to Myer EmporiumMyer Emporium at at time of assignmenttime of assignment

Many sets of rules can now apply:Many sets of rules can now apply: ordinary income, CGT, alienation rules, ordinary income, CGT, alienation rules,

Division 16E, traditional securitiesDivision 16E, traditional securities

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Myer EmporiumMyer Emporium under TVM under TVM Single set of rules apply to deny Single set of rules apply to deny

anticipated tax benefitsanticipated tax benefits No gain arises on assignment No gain arises on assignment

because receipt equals tax value of because receipt equals tax value of the asset the asset (right to interest) given up(right to interest) given up

$45.4m gain assessed over loan $45.4m gain assessed over loan period, on accruals basis (TOFA rules period, on accruals basis (TOFA rules apply)apply)

Result reflects economic outcomeResult reflects economic outcome

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Consolidation of Company GroupsConsolidation of Company Groups Under consolidation proposals, Under consolidation proposals,

allocation of tax values to assets allocation of tax values to assets and liabilities is complex becauseand liabilities is complex because consolidation requires the tax value of consolidation requires the tax value of

assets to be restatedassets to be restated assets/liabilities do not have a unique assets/liabilities do not have a unique

tax value under current lawtax value under current law complex law required to specify complex law required to specify

multiple tax values of certain assetsmultiple tax values of certain assets varied valuation rules applyvaried valuation rules apply

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Consolidation under TVMConsolidation under TVM Simpler to applySimpler to apply

Assets/liabilities have a unique tax Assets/liabilities have a unique tax value under TVMvalue under TVM

Easier to restate this tax value on Easier to restate this tax value on commencement of consolidationcommencement of consolidation

Simpler drafting of consolidation Simpler drafting of consolidation legislation. Legislation less complexlegislation. Legislation less complex

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Metal ManufacturesMetal Manufactures

MetalManufactures State Bank

Sale of plant

$50m

Lease payments

Lease of plant

Facts:

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Metal ManufacturesMetal Manufactures under current law under current law Commissioner argued portion of lease Commissioner argued portion of lease

rental was a non-deductible capital rental was a non-deductible capital expenseexpense

Full Federal Court: Full Federal Court: finance lease could not be characterised as finance lease could not be characterised as

loan loan lease payments were fully deductible. No lease payments were fully deductible. No

portion was a capital expenseportion was a capital expense

Effective outcome is a deduction for loan Effective outcome is a deduction for loan repaymentsrepayments

Will the Parliament make a legislative Will the Parliament make a legislative response?response?

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Metal ManufacturesMetal Manufactures under TVM under TVM Characterisation of the arrangement Characterisation of the arrangement

irrelevantirrelevant TVM effectively divides rental TVM effectively divides rental

payments:payments: notional interest notional interest ‘deductible’ ‘deductible’ notional principal notional principal notnot ‘deductible’ ‘deductible’

Reflects economic outcome because Reflects economic outcome because only actual losses recognisedonly actual losses recognised

Specific amendments to the law not Specific amendments to the law not required required

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Part B:Part B:Observations on Observations on four instancesfour instances

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These four instances deal with...These four instances deal with... Current legislation Current legislation

e.g. CGTe.g. CGT Current case law Current case law

e.g. e.g. Myer EmporiumMyer Emporium Current policy development Current policy development

e.g. Consolidation of company groupse.g. Consolidation of company groups Possible future policy development Possible future policy development

e.g. Sale and lease-back transactions/e.g. Sale and lease-back transactions/Metal ManufacturesMetal Manufactures

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What do the four instances show…What do the four instances show…

Myer EmporiumMyer Emporium Current income recognition faults are Current income recognition faults are

eliminatedeliminated Case law and litigation should be Case law and litigation should be

reducedreduced Tax scheme opportunities and Tax scheme opportunities and

incentives reducedincentives reduced asymmetry and timing anomalies asymmetry and timing anomalies

eliminatedeliminated some schemes not have tax advantages, some schemes not have tax advantages,

so not happenso not happen

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What do the four instances show…What do the four instances show…

CGT and “CGT and “Myer Emporium”Myer Emporium” Rules Rules TVM reduces volume of lawTVM reduces volume of law Legislation shorter and simpler because:Legislation shorter and simpler because:

one way of doing thingsone way of doing things standardised core rulesstandardised core rules no overlappingno overlapping

Other areas will be shorter, or removed, Other areas will be shorter, or removed, for the same reasons (e.g. debt for the same reasons (e.g. debt forgiveness forgiveness rules)rules)

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What do the four instances show…What do the four instances show…

ConsolidationsConsolidations TVM improves current policy processTVM improves current policy process One way of doing things:One way of doing things:

cohesive platform for policy cohesive platform for policy developmentdevelopment

simpler legislation means easier simpler legislation means easier developmentdevelopment

easier to identify policy departureseasier to identify policy departures simplifies support products (e.g. simplifies support products (e.g.

publications explaining obligations)publications explaining obligations)

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What do the four instances show…What do the four instances show…

Sale and leaseback transactionsSale and leaseback transactions Future policy issues do not arise (or Future policy issues do not arise (or

can be better handled)can be better handled) advantage of standard core rules and advantage of standard core rules and

cohesive principlescohesive principles Reduces need to amend legislationReduces need to amend legislation Demonstrates ability to deal with Demonstrates ability to deal with

economic/economic/commercial developments (even commercial developments (even those not presently anticipated)those not presently anticipated)

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What are wider implications?What are wider implications? Instances identified demonstrate Instances identified demonstrate

positive outcomes from TVM positive outcomes from TVM proposalproposal

Further instances where positive Further instances where positive outcomes arise can be identified e.g. outcomes arise can be identified e.g. write off of IRU’swrite off of IRU’s

Issue remains whether these Issue remains whether these outcomes will extrapolate into outcomes will extrapolate into benefits for the income tax system benefits for the income tax system per seper se

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Part C:Part C:What benefits What benefits

arise from these arise from these instances?instances?

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Benefits to legislationBenefits to legislation Clearer and more coherent structureClearer and more coherent structure

e.g. better consolidations provisionse.g. better consolidations provisions Better drafted provisionsBetter drafted provisions Shorter and less complexShorter and less complex

fewer provisions to assess specific fewer provisions to assess specific circumstances (e.g. no specific CGT circumstances (e.g. no specific CGT rules)rules)

No gaps, no overlapsNo gaps, no overlaps

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Benefits to law designBenefits to law design Standardised definition of income and Standardised definition of income and

core rulescore rules cohesive platform for policy development cohesive platform for policy development

(clear benchmark for assessing (clear benchmark for assessing appropriate income and expenditure appropriate income and expenditure recognition)recognition)

easier to explain effect of policy decisionseasier to explain effect of policy decisions easier to implement actual policy intenteasier to implement actual policy intent no need to reinvent the wheelno need to reinvent the wheel

Appropriate default treatmentAppropriate default treatment fewer amendmentsfewer amendments

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Benefits to law usersBenefits to law users One way of doing thingsOne way of doing things

easier to analyse transactions and easier to analyse transactions and avoid errorsavoid errors

easier to understand and explain the easier to understand and explain the lawlaw

easier to discern policy intenteasier to discern policy intent Reduced volume of lawReduced volume of law Less new law to learn and teachLess new law to learn and teach Less support materialLess support material

fewer rulings, casesfewer rulings, cases

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Benefits to taxpayersBenefits to taxpayers Law more certainLaw more certain More appropriate assessmentsMore appropriate assessments

closer to economic outcomes (e.g. no closer to economic outcomes (e.g. no timing anomalies)timing anomalies)

Less tax litigation (and less dispute)Less tax litigation (and less dispute) Impact:Impact:

improved certainty in making business improved certainty in making business decisionsdecisions

less resources diverted to tax planning less resources diverted to tax planning and auditsand audits

improved support productsimproved support products

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Part D:Part D:Reform Reform

alternatives to alternatives to TVM?TVM?

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Are other options available?Are other options available? Three alternatives can be discerned:Three alternatives can be discerned:

piecemeal reform of particular problemspiecemeal reform of particular problems trialing TVM (e.g. with TOFA)trialing TVM (e.g. with TOFA) use accounting profit as taxable incomeuse accounting profit as taxable income

““Option 3”Option 3” Working Group proposal to Working Group proposal to

(i)(i) capture TVM benefits andcapture TVM benefits and

(ii)(ii) provide an alternate provide an alternate approach to establishing approach to establishing case for TVMcase for TVM

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Piecemeal reformPiecemeal reform Enact legislation for specific problems

e.g. relieve identified black hole expenses likely to compound existing complexity can only solve identified problems

Does not allow a single integrated systemic solution (unlike TVM) discrete solution for each problem lack of clear platform for future

developments

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Trialing TVMTrialing TVM Another approach to piecemeal reformAnother approach to piecemeal reform Trialing is inconsistent with TVM’s Trialing is inconsistent with TVM’s

“essential thesis”“essential thesis” TVM’s objective is to standardise the TVM’s objective is to standardise the

definition of income and use core concepts definition of income and use core concepts across the lawacross the law

TVM mechanism already pervades TVM mechanism already pervades current lawcurrent law e.g. most recently in uniform capital e.g. most recently in uniform capital

allowancesallowances

TVM mechanism has a proven success TVM mechanism has a proven success record (e.g. trading stock, CGT)record (e.g. trading stock, CGT)

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Accounting profit as taxable incomeAccounting profit as taxable income Adjustments required forAdjustments required for

policy and jurisdictional issues (e.g. policy and jurisdictional issues (e.g. R&D, CGT discount, non-deductible R&D, CGT discount, non-deductible gifts, non-residents, etc)gifts, non-residents, etc)

unrealised gains and lossesunrealised gains and losses ““Adjusted accounting profit” is Adjusted accounting profit” is

equivalent to TVMequivalent to TVM Gammie proposals are close to TVMGammie proposals are close to TVM

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Option 3: Working Group proposalOption 3: Working Group proposal Implement components of TVM Implement components of TVM

proposals if “Big Bang” TVM not proposals if “Big Bang” TVM not adoptedadopted

Alternative to benchmark TVM against Alternative to benchmark TVM against (other than current law)(other than current law)

Means to justify introduction of “Big Means to justify introduction of “Big Bang” TVMBang” TVM Natural conclusion of incremental Natural conclusion of incremental

improvement is TVM!improvement is TVM! Conduct as part of TVM Project (underConduct as part of TVM Project (under

Board auspices). Resources? Funding?Board auspices). Resources? Funding?

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Part E:Part E:Future actionsFuture actions

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Proposed action plan for TVMProposed action plan for TVM Complete draft legislation (including Complete draft legislation (including

CGT, private and domestic, STS, non-CGT, private and domestic, STS, non-residents)residents)

Issue draft legislation, explanatory Issue draft legislation, explanatory material and support products (returns, material and support products (returns, guidelines) for public commentguidelines) for public comment

Undertake detailed compliance and Undertake detailed compliance and consequence testing (Chris Evans, Neil consequence testing (Chris Evans, Neil Warren, et al)Warren, et al)

Complete “Option 3” workComplete “Option 3” work Review introduction timetableReview introduction timetable

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A deferred (realistic) timetableA deferred (realistic) timetable

TVM in useTest and evaluate

Develop law and administration package

Communicate and educate

Tax Reform Fatigue

1/7/04 or1/7/05?

1/3/03?

Board decision:• Recommend

future actionto Govt.

Board decision:• Formal release

for publiccomment

30/9/02?20/9/01

Board decision:• Continue

development& evaluation?

10/8/00

Govt. decision:• Board to develop

prototype law andadministrationpackage

Ralph review andrecommendation

We arehere

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Part F:Part F:SummarySummary

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What are the benefits of TVM?What are the benefits of TVM? TVM has benefits, but must be TVM has benefits, but must be

weighed against costsweighed against costs TVM Project has benefits:TVM Project has benefits:

““spin-off” technologyspin-off” technology insight into current tax systeminsight into current tax system

Income tax system has three basic Income tax system has three basic components: assessing, entities and components: assessing, entities and administrationadministration TVM Project is vehicle to improve the TVM Project is vehicle to improve the

assessing functionassessing function