2016-02-26 Chair 2016 Tax Institute Speech Outline (3)

Past, Present, Future - The Board of Taxation

The following speech was delivered by the CEO, Karen Payne to the Victorian Tax Institute 4th Annual Tax Forum on 5 October 2016

Thank you for that introduction and thank you for inviting me to speak at The Tax Institute’s Annual Victorian Tax Forum.

I appreciate the opportunity to be part of this forum and look forward to participating in the remainder of the program over the next 2 days.

It is always reassuring to be in a room filled with other tax specialists – lawyers or accountants or both. Although I don’t expect you will agree with everything I say – consensus amongst tax practitioners is rare and unusual – I do take some comfort from the fact that we have a common starting point or a shared lens to inform our perspective. Although Richard Murphy’s title The Joy of Tax– may misrepresent and exaggerate the reality, there are some debates and issues that only a tax specialist can appreciate and get enthusiastic about. I hope that some of the insights I will share with you today allow you to share my enthusiasm for the role and work of the Board of Taxation.

I have had a long association with the Tax Institute - more than 20 years –and have always appreciated forums such as these – for the opportunity to have a professional discourse on matters of taxation that can in other forums – become emotionally charged and at times (I won’t say ill) but lets say less informed.

The Tax Institute is a reliable contributor of well researched and reasoned submissions on tax laws and the need for tax change and reform. In my new role as CEO I have a much greater interest in such submissions and have enjoyed the opportunity to collaborate with the Tax Institute on Board projects – more on this later.

I want to focus on three key themes today.

• The Board and its reinvention
• The Tax systemagenda and how the Board can assist
• The Board’s Agenda and priorities in 2016 and 2017 and how you can assist the Board

1The Board and its reinvention

Firstly a little bit of context and background about the Board. It is a unique institution.

The Board is made up of 8 private sector appointments and 3 ex-officio members. At the start of 2015, the Board was almost entirely reconstituted to include a broader range of governance and business expertise under the Chair of Michael Andrew AO. Cognitive Diversity,business experience, gender and geographic diversity are all very important in formulating the mix for the Board.

Hopefully the members of the Board are well known to you and further details are on the Board’s website. So I won’t spend too much time introducing them individuallythis morning but just to name them.

• Michael Andrew AO – Chair
• John Emerson AM – Deputy Chair
• Mark Pizzacalla, PhD - Partner, BDO Australia
• Karen Payne
• Neville Mitchell - CFO and Company Secretary for Cochlear Limited
• Peggy Lau Flux, MBA
• Craig Yaxley - Tax Partner, KPMG Perth
• Ann-Maree Wolff - Asia Pacific Head of Tax, Rio Tinto

Ex Officio Members

• John Fraser, Treasury Secretary
• Chris Jordan AO - Commissioner of Taxation
• Peter Quiggin PSM - First Parliamentary Counsel

In addition to the Board members themselves, the work of the Board is supported by a full-time Secretariat spread across sites in Canberra, Sydney and Melbourne. As CEO to the Board I am based in Sydney. I lead the work of the Secretariat and am actively involved in communications with industry, professional, government agency and other stakeholders. It is fair to say that the composition of the Secretariat mirrorsthe key stakeholderswith whom we consult and interact.

It is comprised of secondees from:

• Private sector;
• The ATO and
• Treasury

I was appointed to the role of CEO in March 2016. This is a new role for the Board of Taxation, recognising the extended Advisory role of the Board and that the Government is keen for the Board to play a more active real time consultation role.

I want to spend a little time exploring how I see the Board fits in to the Tax System to provide you with this context for the rest of the discussion – especially the tax agenda discussion.

The Board of Tax in the Tax Framework - Governance and Stewardship

The Board of Taxation is a non statutory independent advisor to Government but its organisational structure, staffing and operations have close connections to both Treasury and the Australian Taxation Office (ATO). In my view this is not only sensible but intuitive when you consider the necessary overlap and complementary objectives of the functions of the Board and Treasury and the ATO.

The function of the Board according to its Charter is to provide advice to the Minister (Minister for Revenue and Financial Services and Treasurer) on:

• the quality and effectiveness of tax legislation and the processes for its development, including the processes of community consultation and other aspects of tax design;
• improvements to the general integrity and functioning of the taxation system;
• research and other studies commissioned by the Board on topics approved or referred by the Treasurer; and
• other taxation matters referred to the Board by the Treasurer.

These functions have overlap with the functions of both Treasury and the ATO:

• Treasury – formulates tax policy and the design of the tax law to achieve that same policy, including the costing and forecasting of the likely revenue impact.
• The ATO – also has input into the design of the tax law, particularly through its Legislative Companion Guides, rulings and revenue costing teams.
• The Board – advises on the design and implementation of tax laws (complexity, integrity, compliance) – especially reflecting the community views through ongoing consultations.

So we have overlapping functions – which is not to suggest that the Board duplicates either Treasury or the ATO because the Board necessarily brings to the table the perspective of the tax and business community as well as other welfare stakeholders – including charities and unions.

The activities of the Board also complement the functions of both Treasury and the ATO:

• Treasury – is responsible for the introduction of the law (but has little interaction with that law once enacted);
• The ATO – is responsible for administering tax law and through its guidance material setting out its interpretation of the law, but is not responsible for making or amending the law – even where it is ineffective.
• The Board on the other hand considers the operation of the law as implemented and administered to ensure it is functioning effectively including without undue complexity.

I see the function of the Board as fundamentally closing the loop or if you like, making the circle complete.

Board’s current approach

Traditionally, the Board has given effect to its charter by conducting detailed technical and post-implementation reviews on specified aspects of Australia’s tax system. This would culminate in the provision of a report to Government – sometimes consultations extended over several years. The Government would then consider the Board’s report, and would make a decision to release it to the public along with its response.

The Board’s current approach is to act as a trusted advisor to both Treasury and the Government on tax policy and design. Our focus is to contribute to ‘real-time’ tax policy issues – which means that Board members are contributing their business experience at a much earlier stage in the policy development process.

The Board will nevertheless continue to be involved in technical and post-implementation reviews as opportunities and terms of reference arise.

However, in this new role, the relationship between the Board and Treasury has strengthened and the Board is providing real-time advice across three broad areas:

1. Policy design
2. Legislative design
3. Administration of Australia’s tax system

For example, the board has led consultations for the purposes of:

•providing advice on the future of ‘announced but un-enacted measures’;

•providing input on major economic initiatives such as the government’s small business package, innovation statement; the Tax Reform Agenda; and

•providing input into the ongoing review of the research and development incentive; and

•resolving ongoing issues in relation to consolidation measures.

•The Board has also provided comments on preliminary Budget measures and initiatives as they are being developed.

The Board has a successful record acting as an effective interface between the private sector and government on key tax policy and law design issues. Our role is effective because of the ongoing meaningful relationships we have with stakeholders such as the Tax Institute, its membership and yourselves.

It is important to remember however, that we are an advisory board and I wouldn’t want you to have the impression that all of our advice is necessarily acted upon.

This is appropriate because ultimately it is the Government that is elected.

The Australian Constitution, the Westminster system and political theory, recognises three powers of government—the legislative power to make laws; the executive power to carry out and enforce the laws; and the judicial power to interpret laws and to judge whether they apply in individual cases.

This division is based on the principle that the power to govern should be distributed between the Parliament, the Executive and the Judiciary to avoid one group having all the power and so that each keeps a check on the actions of the others.

Although the separation of powers and Rule of Law principles suggest the judiciary and the Courts are the ultimate arbiters of law and have final responsibility for applying the law, as Justice Brennan observed:

"The law which rules - is the law according to the rulings of the courts, but it is applied in the offices and chambers of the legal profession. It is applied in drafting and advising; in consultations more than litigation."

- The Hon Sir Gerard Brennan AC, “Role of the Legal Profession in the Rule of Law”, Supreme Court, Brisbane, 31 August 2007.

Another fundamental principle of the Rule of Law is that the law must be both readily known and available, and certain and clear.

So although the separation of powers has important Constitutional significance which reserves power to the Judiciary, the commercial reality is that law and especially tax laws are ‘applied’ and upheld more so in day to day commerce as advised by tax advisers, such as yourself. Accordingly it is not just in your interest but part of your professional responsibility to uphold the rule of law and ensure that laws are:

• clear, predictable and accessible
• publicly made and the community is able to participate in the law-making process

This is in part – one of the functions of the Board of Taxation.

Another related priority for the Board is to ensure our tax laws deliver certainty and clarity which is of fundamental importance to facilitate business and commerce. So there is an alignment and co-incidence of purposes here – theory and practice converge. Tax laws that are readily known and available, and certain and clear – are necessary to uphold the Rule of Law and are good for business and ultimately the community.

This business and community perspective is an important part of the function of the Board of Taxation.

2The Tax Agenda

The tax agenda appears destined in the current political and economic environment for incremental reform or change.

For example, in Australia- the progressive cut in the corporate tax rate (that is currently before Parliament) is anexample of this incremental reform approach. This appears to be a response to both economic and political constraints– namely constrained revenue growth, rapid technological change, uncertainty,unpredictable and challenging global economic conditions.

Incremental change or reform is not confined to Australia.

Incremental Radicalism

In New Zealand, the Finance Minister - Bill English has proudly labelled the approach of the Keyes Government to political reform as Incremental Radicalism. This was a comment made by the New Zealand Finance Ministerwhen he delivered the Annual John Howard Lecture to Menzies Research Centre in Australia on 25 June 2015. The term, Incremental radicalism was used to distinguish it from the alternative – the ‘crash or crash through’ political approach which he described ascreating a burning platform, initiating rapid change, and spending large amounts of political capital which you hope you will recoup when the expected benefits flow through sufficiently strongly for the government to be re-elected.

Uncertainty, unpredictable & challenging global economic conditions are for obvious reasons not conducive to this ‘crash or crash through’ approach.

UK Business Tax Road Map

The approach in the United Kingdom has been slightly different but still evidences elements of incremental approach to change. The UK in 2010 released their publication the ‘Corporate Tax Road Map’ - to signal the direction for their tax reforms, even if those reforms were not immediately available . The roadmap is intended to set the direction for change and the ultimate ambitions or objectives for their tax system so that each intervening reform can be seen as a step in that same ‘right’ direction. Although these principles were initially developed for reform of corporation tax, they have also guided reforms initiated in other areas of business taxation. The principles which have underpinned their direction for reform were:

• Lowering rates while maintaining the tax base
• Maintaining stability
• Maintaining a level playing field for taxpayers
• Being aligned with modern business practice
• Avoiding complexity

All very sensible and not so much radical.

The UK roadmap states that the Government’s ambition is to make the UK’s corporation tax regime the most competitive in the G20. Two observations about the UK approach:

• First - the UK appears to be regard taxation policy as a strategic opportunity in itself rather than a means to achieve an economic strategy;
• Second - it is also worth noting that there are mixed views (even within the UK) about the success of this road map. That is, whether it has helped to progress the tax agenda.

Each of these examples emphasise that incremental change can be a relevant model for tax system improvement and reform.

Incrementalism, has been used successfully for many years by business. It is not necessarily a bad thing.

Kai = ChangeZen = Good

I am sure that most of you will be familiar with the Japanese expressionor philosophy Kaizen - Japanese for "improvement" which has long been associated with continuous improvement associated with total quality management.

Japan has been applying Kaizen since the Second World Warto successfully rebuild their business and industrial economy, influenced in part by American business and quality management teachers who visited the country.

It has since spread throughout the world[4] and is used outside of business and productivity – including in healthcare,[2]life-coaching, government, banking, and other industries.

During this period of incremental change the key message is continuous improvement and … Patience.

Patience is not the ability to wait but how you act while you wait.

Accordingly even if your tax reform agenda wish list is ambitious - it is not the case that tax reform is ‘dead’ ‘dormant’ or ‘extinct’ – it may simply be progressing at a different pace of change in response to both economic and political constraints.

The opportunity for both tax reform and tax system improvement remains. I want to spend some time exploring this theme.

What’s on the tax agenda for Australia

The tax agenda over the next few years is already looking very busy and crowded.

Significant tax reforms were announced in the 2016-17 Budget which are yet to be enacted - reforms to reduce the tax burden on business, including: cutting the company tax rate to 25 per cent over time; tax integrity measures including the diverted profits tax; the superannuation reform package; other targeted reforms especially for small business;an increase in tobacco taxes and implementation of the OECD hybrid mismatch rules.

There is also a world outside Tax and legislation to be enacted to give effect to other Government priorities – such as the Collective Investment Vehicle regime.

The Minister for Revenue and Financial Services already has a lot on her plate.

There is alreadya long list of things to get enacted.

This is not to mention the implementation of other measures included in previous Board reports

Last year (on 4 June 2015), the Government released all of the outstanding Board reports that had been written over many previous years:

• Debt equity reports (2 years)
• Post-implementation review of Div 7A (3 years)
• Collective investment vehicles (18 months)
• Thin capitalisation arm’s length debt test (18 months)
• Permanent establishments (12 months)

So there is a long list (already) of things still to be enacted.

So whilst we are all aware of the need to progress tax reform – what should be our expectations and priorities for tax reform and how can the Board assist?

There is no shortage of ideas for tax reform in Australia and the ideas contributed over the last year will not be lost and will continue to be considered in years to come.

Whilst I agree a long term vision or road map for tax reform is a worthy ambition, my wish list for tax reform is perhaps more short term and immediate.

I would firstly like to see the programme of announced measures actually get enacted in an orderly and timely manner. I think the indeterminate state of tax legislation has great potential to undermine business confidence.