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TaxValueMethod Tax Value Method. TaxValueMethod Outline of presentation Part A: Four instances for benefit Part B: Observations on the four instances.

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Presentation on theme: "TaxValueMethod Tax Value Method. TaxValueMethod Outline of presentation Part A: Four instances for benefit Part B: Observations on the four instances."— Presentation transcript:

1 TaxValueMethod Tax Value Method

2 TaxValueMethod Outline of presentation Part A: Four instances for benefit Part B: Observations on the four instances Part C: What benefits arise? Part D: Reform alternatives to TVM Part E: Future actions Part F: Summary

3 TaxValueMethod Assumptions for presentation Presentation focuses on outcomes and benefits sought from TVM, plus reform alternatives and reform actions Presentation focuses on outcomes and benefits sought from TVM, plus reform alternatives and reform actions Presentation assumes that a case has been made for reform of the income tax system (“The Essential Thesis”) Presentation assumes that a case has been made for reform of the income tax system (“The Essential Thesis”) Presentation assumes operation of TVM is understood (“The Mechanism”) Presentation assumes operation of TVM is understood (“The Mechanism”)

4 TaxValueMethod Part A: Four instances for benefit

5 TaxValueMethod CGT: No regime required! TVM automatically brings all capital gains and capital losses to account TVM automatically brings all capital gains and capital losses to account  Only need rules for 50% discount, small business concession and capital losses TVM reduces CGT law. So far, TVM reduces CGT law. So far,  126 pages  29 pages  39 CGT events  2 events (likely) Why? Why?  Net income calculation captures gain/loss on all assets/liabilities

6 TaxValueMethod CGT: Predicted administrative benefits Estimated administrative and compliance improvements could be: Estimated administrative and compliance improvements could be:  51% reduction in CGT related rulings  32% reduction in CGT related litigation  180,000 fewer phone calls to ATO p.a.  19,000 fewer requests for amendment p.a.  15,000 fewer letters p.a.  770 fewer objections p.a.  800 fewer private binding rulings p.a.

7 TaxValueMethod Myer Emporium Myer Finance Citicorp 1. $80m loan 2. interest 12.5% p.a. 3. $45.4m assignment fee 4. Interest payments 5. $80m loan repayment Facts:

8 TaxValueMethod Myer Emporium under current law Lower courts: Lower courts:  $45.4m not taxable, so  Parliament added new income alienation rules Then High Court: Then High Court:  $45.4m taxable to Myer Emporium at time of assignment Many sets of rules can now apply: Many sets of rules can now apply:  ordinary income, CGT, alienation rules, Division 16E, traditional securities

9 TaxValueMethod Myer Emporium under TVM Single set of rules apply to deny anticipated tax benefits Single set of rules apply to deny anticipated tax benefits No gain arises on assignment because receipt equals tax value of the asset (right to interest) given up No gain arises on assignment because receipt equals tax value of the asset (right to interest) given up $45.4m gain assessed over loan period, on accruals basis (TOFA rules apply) $45.4m gain assessed over loan period, on accruals basis (TOFA rules apply) Result reflects economic outcome Result reflects economic outcome

10 TaxValueMethod Consolidation of Company Groups Under consolidation proposals, allocation of tax values to assets and liabilities is complex because Under consolidation proposals, allocation of tax values to assets and liabilities is complex because  consolidation requires the tax value of assets to be restated  assets/liabilities do not have a unique tax value under current law  complex law required to specify multiple tax values of certain assets  varied valuation rules apply

11 TaxValueMethod Consolidation under TVM Simpler to apply Simpler to apply  Assets/liabilities have a unique tax value under TVM  Easier to restate this tax value on commencement of consolidation  Simpler drafting of consolidation legislation. Legislation less complex

12 TaxValueMethod Metal Manufactures Metal Manufactures State Bank Sale of plant $50m Lease payments Lease of plant Facts:

13 TaxValueMethod Metal Manufactures under current law Commissioner argued portion of lease rental was a non-deductible capital expense Commissioner argued portion of lease rental was a non-deductible capital expense Full Federal Court: Full Federal Court:  finance lease could not be characterised as loan  lease payments were fully deductible. No portion was a capital expense Effective outcome is a deduction for loan repayments Effective outcome is a deduction for loan repayments Will the Parliament make a legislative response? Will the Parliament make a legislative response?

14 TaxValueMethod Metal Manufactures under TVM Characterisation of the arrangement irrelevant Characterisation of the arrangement irrelevant TVM effectively divides rental payments: TVM effectively divides rental payments:  notional interest  ‘deductible’  notional principal  not ‘deductible’ Reflects economic outcome because only actual losses recognised Reflects economic outcome because only actual losses recognised Specific amendments to the law not required Specific amendments to the law not required

15 TaxValueMethod Part B: Observations on four instances

16 TaxValueMethod These four instances deal with... Current legislation Current legislation  e.g. CGT Current case law Current case law  e.g. Myer Emporium Current policy development Current policy development  e.g. Consolidation of company groups Possible future policy development Possible future policy development  e.g. Sale and lease-back transactions/ Metal Manufactures

17 TaxValueMethod What do the four instances show… Myer Emporium Current income recognition faults are eliminated Current income recognition faults are eliminated Case law and litigation should be reduced Case law and litigation should be reduced Tax scheme opportunities and incentives reduced Tax scheme opportunities and incentives reduced  asymmetry and timing anomalies eliminated  some schemes not have tax advantages, so not happen

18 TaxValueMethod What do the four instances show… CGT and “Myer Emporium” Rules TVM reduces volume of law TVM reduces volume of law Legislation shorter and simpler because: Legislation shorter and simpler because:  one way of doing things  standardised core rules  no overlapping Other areas will be shorter, or removed, for the same reasons (e.g. debt forgiveness rules) Other areas will be shorter, or removed, for the same reasons (e.g. debt forgiveness rules)

19 TaxValueMethod What do the four instances show… Consolidations TVM improves current policy process TVM improves current policy process One way of doing things: One way of doing things:  cohesive platform for policy development  simpler legislation means easier development  easier to identify policy departures  simplifies support products (e.g. publications explaining obligations)

20 TaxValueMethod What do the four instances show… Sale and leaseback transactions Future policy issues do not arise (or can be better handled) Future policy issues do not arise (or can be better handled)  advantage of standard core rules and cohesive principles Reduces need to amend legislation Reduces need to amend legislation Demonstrates ability to deal with economic/ commercial developments (even those not presently anticipated) Demonstrates ability to deal with economic/ commercial developments (even those not presently anticipated)

21 TaxValueMethod What are wider implications? Instances identified demonstrate positive outcomes from TVM proposal Instances identified demonstrate positive outcomes from TVM proposal Further instances where positive outcomes arise can be identified e.g. write off of IRU’s Further instances where positive outcomes arise can be identified e.g. write off of IRU’s Issue remains whether these outcomes will extrapolate into benefits for the income tax system per se Issue remains whether these outcomes will extrapolate into benefits for the income tax system per se

22 TaxValueMethod Part C: What benefits arise from these instances?

23 TaxValueMethod Benefits to legislation Clearer and more coherent structure Clearer and more coherent structure  e.g. better consolidations provisions Better drafted provisions Better drafted provisions Shorter and less complex Shorter and less complex  fewer provisions to assess specific circumstances (e.g. no specific CGT rules) No gaps, no overlaps No gaps, no overlaps

24 TaxValueMethod Benefits to law design Standardised definition of income and core rules Standardised definition of income and core rules  cohesive platform for policy development (clear benchmark for assessing appropriate income and expenditure recognition)  easier to explain effect of policy decisions  easier to implement actual policy intent  no need to reinvent the wheel Appropriate default treatment Appropriate default treatment  fewer amendments

25 TaxValueMethod Benefits to law users One way of doing things One way of doing things  easier to analyse transactions and avoid errors  easier to understand and explain the law  easier to discern policy intent Reduced volume of law Reduced volume of law Less new law to learn and teach Less new law to learn and teach Less support material Less support material  fewer rulings, cases

26 TaxValueMethod Benefits to taxpayers Law more certain Law more certain More appropriate assessments More appropriate assessments  closer to economic outcomes (e.g. no timing anomalies) Less tax litigation (and less dispute) Less tax litigation (and less dispute) Impact: Impact:  improved certainty in making business decisions  less resources diverted to tax planning and audits  improved support products

27 TaxValueMethod Part D: Reform alternatives to TVM?

28 TaxValueMethod Are other options available? Three alternatives can be discerned: Three alternatives can be discerned:  piecemeal reform of particular problems  trialing TVM (e.g. with TOFA)  use accounting profit as taxable income “Option 3” “Option 3”  Working Group proposal to (i)capture TVM benefits and (ii)provide an alternate approach to establishing case for TVM

29 TaxValueMethod Piecemeal 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

30 TaxValueMethod Trialing TVM Another approach to piecemeal reform Another approach to piecemeal reform Trialing is inconsistent with TVM’s “essential thesis” Trialing is inconsistent with TVM’s “essential thesis”  TVM’s objective is to standardise the definition of income and use core concepts across the law TVM mechanism already pervades current law TVM mechanism already pervades current law  e.g. most recently in uniform capital allowances TVM mechanism has a proven success record (e.g. trading stock, CGT) TVM mechanism has a proven success record (e.g. trading stock, CGT)

31 TaxValueMethod Accounting profit as taxable income Adjustments required for Adjustments required for  policy and jurisdictional issues (e.g. R&D, CGT discount, non-deductible gifts, non- residents, etc)  unrealised gains and losses “Adjusted accounting profit” is equivalent to TVM “Adjusted accounting profit” is equivalent to TVM Gammie proposals are close to TVM Gammie proposals are close to TVM

32 TaxValueMethod Option 3: Working Group proposal Implement components of TVM proposals if “Big Bang” TVM not adopted Implement components of TVM proposals if “Big Bang” TVM not adopted Alternative to benchmark TVM against (other than current law) Alternative to benchmark TVM against (other than current law) Means to justify introduction of “Big Bang” TVM Means to justify introduction of “Big Bang” TVM  Natural conclusion of incremental improvement is TVM! Conduct as part of TVM Project (under Board auspices). Resources? Funding? Conduct as part of TVM Project (under Board auspices). Resources? Funding?

33 TaxValueMethod Part E: Future actions

34 TaxValueMethod Proposed action plan for TVM Complete draft legislation (including CGT, private and domestic, STS, non- residents) Complete draft legislation (including CGT, private and domestic, STS, non- residents) Issue draft legislation, explanatory material and support products (returns, guidelines) for public comment Issue draft legislation, explanatory material and support products (returns, guidelines) for public comment Undertake detailed compliance and consequence testing (Chris Evans, Neil Warren, et al) Undertake detailed compliance and consequence testing (Chris Evans, Neil Warren, et al) Complete “Option 3” work Complete “Option 3” work Review introduction timetable Review introduction timetable

35 TaxValueMethod A deferred (realistic) timetable TVM in use Test and evaluate Develop law and administration package Communicate and educate Tax Reform Fatigue 1/7/04 or 1/7/05? 1/3/03? Board decision: Recommend future action to Govt. Board decision: Formal release for public comment 30/9/02?20/9/01 Board decision: Continue development & evaluation? 10/8/00 Govt. decision: Board to develop prototype law and administration package Ralph review and recommendation We are here

36 TaxValueMethod Part F: Summary

37 TaxValueMethod What are the benefits of TVM? TVM has benefits, but must be weighed against costs TVM has benefits, but must be weighed against costs TVM Project has benefits: TVM Project has benefits:  “spin-off” technology  insight into current tax system Income tax system has three basic components: assessing, entities and administration Income tax system has three basic components: assessing, entities and administration  TVM Project is vehicle to improve the assessing function


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