How can the Australian tax system stay fit for purpose?

If the Australian tax system is to remain fit for purpose in the long term, it will need a bit more than regulator maintenance.

It is unsurprising in these disrupted and uncertain times that the question of taxation and fairness should be assuming such significance in media headlines, parliament and social conversations. There are diverse and great expectations imposed on our tax system — including raising revenue to fund social programs, a feature of the social licence to operate a business for profit and allocate investment returns, wealth redistribution and a fee for access to social infrastructure.

These conversations, in Australia and elsewhere, have to date largely been dominated with the question of whether company taxpayers, multinationals in particular, are paying their fair share of tax.

The conversation has in recent times expanded to consider the question of whether the tax system itself is fair… and if not, why not? And if not, who is to blame for its unfair condition — assuming there is a single identifiable institution or person to hold accountable? A more positive framing would shift the emphasis slightly — from who is to blame to how can we improve on this?

Just who is accountable? The Australian parliament, the elected politicians, the Treasurer, the Treasury, the ATO, other agencies, the tax profession, the business community, investors… and so on? There is no appointed single guardian of the tax system — whether statically or inter-generationally — to guarantee its contemporaneous fairness and to ensure that it meets today’s fit-for-purpose requirements. Stakeholders collectively (although not always collaboratively) contribute to the end result.

Accountability for corporate taxpayers paying their fair share of tax is clearly an objective, financially verifiable, evidenced-based question, which boards can and should respond to. Many have responded with voluntary tax transparency reports — to explain their tax contribution to the community, and reconcile and detail material accounting and tax differences.

As of May 2018, 136 organisations had signed up to the Tax Transparency Code, including the top 10 largest corporate taxpayers. The community’s broader interest in the fairness of the tax system (as a whole) is not so obviously a question for individual company boards and their directors.

Even though corporate taxpayers neither design nor administer tax laws, directors can clearly assess, through the lens of their business operations, perspectives around the fairness of the system. This is the best way to ensure the business perspective is at least considered in the complex deliberation of tax policy and design.

The “fairness” of the tax system (or not) is an abstruse notion. Fairness is a relative concept and especially in the area of taxation, reflects the contemporaneous circumstances of the time. Our Tax Act and system is a bit like a vintage car that is expected to transport our society into the future. The current Income Tax Assessment Act 1936 (Cth) is an octogenarian and by many standards “vintage”. A tax system fit for purpose for the next 50-plus years needs more than care and maintenance alone. You can only achieve so much through remodelling and tinkering. Although there have been major modifications to the Act in the past 80-plus years — including an aborted rewrite that resulted in the Income Tax Assessment Act 1997 (Cth) — so at best, we have both a vintage and a classic Act, trying to transport our society into the future. The fairness and fitness of the tax system in these circumstances is clearly worthy of closer examination.

Although societal perceptions around the fairness of the tax system depend on the design of tax laws and the manner in which they are administered — this should not suggest that only the designers, drafters, and regulators are responsible when the tax system is perceived to be unfair. Without an appointed guardian to ensure its ongoing fairness and fitness for purpose, the tax system remains an outcome of an amalgam of processes.

At several single points in time, parliament has to turn its mind to a Tax Bill before the House or the Senate. However, once this Bill has been passed into law, there is no ongoing guardianship of the enacted measure. Clearly, the cycles and vagaries of politics make it difficult for parliament to assume this responsibility.

Treasury and the ATO as well as various other government agencies have a role to play since they are monitoring the system, but there is only so much to be learned from (in a sense) looking on.

Company boards can and should contribute to the conversation about the fairness of the tax system because they are its users. Boards can contribute their leadership, experience and business perspective on the contemporaneous economic, social and investment parameters and, as these change, their consequent impact on the fairness of the tax system.

What was fair yesterday, may be deemed unfair or unfit today, but unless the business users of the system are contributing to the discussion, response times will lag or fail to take account of the business perspective. John Ralph AO recognised the importance of the business perspective in the design and implementation of taxation laws. In the 1999 review, A Tax System Redesigned, he recommended the introduction of a Board of Taxation of external members.

The report noted that external members will bring to the board:

• A broad community perspective and commitment to the national interest
• Expertise and experience in the world of business and commerce
• A strong capacity for assessing tax policy, law and administration plus associated processes.

The Board of Taxation was established as a non-statutory independent advisory board in 2000 following Ralph’s recommendation. The board is a unique institution, even by global standards, and brings together the perspectives of the ATO, Treasury and the business community. There are currently eight external members — Michael Andrew AO (chair), Karen Payne (CEO), Rosheen Garnon, Dr Julianne Jaques, Neville Mitchell, Dr Mark Pizzacalla, Ann-Maree Wolff and Craig Yaxley. The three ex officio members are the Secretary of Treasury, Commissioner of Taxation and First Parliamentary Counsel.

Notwithstanding the community perspective that the board contributes, it is not appointed as a guardian of the tax system and is an advisory board only. However, the board does bring a unique opportunity to contribute the collective of community views and business perspectives together with the ATO and Treasury views, and is accordingly an independent institution to deliver ideas, messages and societal concerns around the fairness and fit-for-purpose nature of the tax system and importantly to identify areas for improvement.

Some recent examples of projects that demonstrate how the Board of Taxation contributes to improve the tax system include:

• Initiating an investigation into shadow economy factors and influencers, which ultimately was investigated in detail though an appointed Black Economy Taskforce chaired by Michael Andrew AO, chair of the Board of Taxation and a former CEO of KPMG International
• Investigating the debt-versus-equity divide for income tax and hybrid mismatch purposes
• Highlighting examples of business concerns around the lack of state tax harmonisation
• Investigating the compliance burden associated with taxation of fringe benefits.

Government has the ultimate responsibility for implementing tax policy, but without a single guardian and sponsor of the tax system, it is important that the business and broader community contribute their views. For example, business will be tackling issues around some or all of these themes — the future of work (employee versus contractor versus gig economy), artificial intelligence and digitalisation of the economy and our ageing population.

Boards should contribute their perspectives on how their business is responding to these issues and how the tax system is relevant to the outcomes. This contribution may be directly or through the independent Board of Taxation.

The AICD also provides a unique forum to deliver these insights. The question of fairness and tax is a conversation for boards to engage with, but not simply as an ethical question. The “business” vision and expectations for our future tax system are important social, legal, economic and financial considerations — and no-one understands the business perspective as well as business. It is time for a deeper conversation and engagement by business — so we can ensure Australia’s taxation system is both fair and fit for purpose for what will be, inevitably, a very different future.

Karen Payne GAICD is CEO of the Board of Taxation, board member of the Australian Reinsurance Pool Corporation (ARPC) and a former tax partner at Minter Ellison