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Thursday, 23 June 2005
Page: 178


Senator SHERRY (7:10 PM) —I would have incorporated my speech on the Tax Laws Amendment (Improvements to Self Assessment) Bill (No. 1) 2005 and the Shortfall Interest Charge (Imposition) Bill 2005, but I cannot because the bills were brought on so quickly. We have incorporated where we can.

Since 1986-87, Australia has operated a system of self-assessment of income tax. Under self-assessment, taxpayers’ returns are generally accepted at face value in the first instance, and the Australian Taxation Office, the ATO, may verify the accuracy of the return and if necessary amend an assessment within a prescribed period. The ATO now has the power to reopen assessments after many years. This has led to some uncertainty and calls for constraints on the Commissioner of Taxation’s capacity to enforce payment with penalties long after the original tax return has been submitted. Concerns of this nature have received some attention in the case of schemes propagated by tax promoters—mass marketed schemes and employee benefit arrangements. Even when a private ruling from the ATO was received, the commissioner had the power to impose tax in contravention of the ruling and impose penalties.

A general view emerged that reform was needed to provide greater certainty for the taxpayers—that, after a period of examination, there was a need for refinements to the present system to reduce both the level of uncertainty for taxpayers and the compliance costs associated with self-assessment while preserving the capacity of the ATO to collect legitimate tax liabilities. In December 2004, the Treasurer announced that he accepted the findings of the review committee and would, where needed, legislate their effect. This bill is the first and most preliminary stage of the process of the implementation of the review’s findings. The full list of recommendations is included in the attachments to the bill.

I turn to the contents of the bill. Schedule 1 creates a new tax, the shortfall interest charge. A shortfall is where the taxpayer has paid too little tax. This usually relates to an amended assessment by the ATO. Late payment is different, as this relates to a known assessment not paid by the due date. The issue with the shortfall is that a taxpayer may not know for some time that he or she has a shortfall—say 18 months. But the current penalty charge, called the general interest charge, at 12.5 per cent, applies not from the date the taxpayer is advised of the error by the ATO but from the original date of assessment. So the high tax penalty applies from a period when a taxpayer has no knowledge that they have underpaid tax. The problem has been exacerbated by taxpayers with multiple assessments involving shortfalls. In some cases, this could occur over a number of years. The bill ensures that the general interest charge will not fall due until 21 days after the ATO advises of the shortfall. Before that, a concessional charge will apply, called the shortfall interest charge, at three per cent plus the prime rate.

Schedule 2 of the bill repeals the special penalty for those failing to follow a private ruling—25 per cent of the shortfall. It also requires the Commissioner of Taxation to supply reasons why a penalty has not been remitted in full and makes a technical clarification about when a position is reasonably arguable. The latter point is not insignificant as the law strictly imposes a high standard on what can be reasonably argued. A position that is reasonably argued avoids the imposition of penalties even if the commissioner disagrees with the assessment.

The current threshold is that the position is as likely to be as correct as incorrect. The ATO interprets this more loosely as ‘about as likely to be correct as incorrect’. The bill enshrines the ATO’s looser and more concessional definition. There are some interesting policy issues around these changes. Simplicity and transparency in the process of taxation administration are matters of justice. Taxpayers have a legitimate expectation that a good faith disclosure of relevant facts combined with a diligent attempt to comply with the law will not lead to the imposition of significant penalties. There are also economic benefits. Taxation uncertainty can threaten business survival and adds risk premiums to finance, increasing the cost of capital. Regulatory transparency, especially in taxation, will lower business compliance costs with consequent gains to productivity and economic welfare.

The reforms in this bill are sound in terms of basic principles of justice, administrative law and tax policy. However, the reforms come too late for those who have been disadvantaged by relying on ATO advice and subjected to penalties. Labor has received many representations in relation to this bill. Many individuals have given evidence to the Senate inquiry identifying the deficiencies in the ATO’s handling of this matter.

I hope the Senate committee review process continues after 1 July, because I think it is a very important check on executive government. There have certainly been many shortcomings identified in pieces of legislation, even though they have gone through the bureaucracy, cabinet, the parliamentary party caucuses and their own committees. The Senate committees play a very effective role in identifying weaknesses in legislation. The Senate committee review process concluded that the bills do not go far enough to address shortcomings identified by the Treasury review of aspects of income tax self-assessment. The establishment of a shortfall interest charge, known as an SIC, which will replace the general interest charge, the GIC, for shortfalls of tax paid in the period between when a taxpayer submits a tax return and when the ATO reassesses the return addresses a notable shortcoming in the GIC system. The GIC is set at a higher rate—currently the 90-day bill rate plus seven per cent to encourage the prompt settlement of tax debts.

The Treasury review has rightly observed that, until they receive an amended assessment, taxpayers are not in a position to respond to this incentive to settle. As such, applying the GIC to reassessments in this way is inequitable. The effects of applying the GIC at a higher rate can be very punitive. The Treasury review notes that over a six-year period the GIC can, at current interest rates, more than double a tax debt. This can result in crushing liabilities from which affected taxpayers can find it difficult to recover. Many of the submissions received by the committee confirm that this is the case. The Treasury review rejects the use of the GIC as a penalty. As the review rightly observes furthermore, the perception that taxpayers are being penalised twice for the same offence, or being penalised where it was decided that no culpability penalty should apply, is undesirable.

In introducing the SIC the government clearly recognises that in many circumstances the GIC is both inequitable and applied inappropriately. Yet, instead of the government taking steps immediately to address the shortcomings that have been identified, the SIC will apply only to the 2004-05 income year and future years. This means that back assessments which can still be conducted for ordinary taxpayers, as distinct from those who are reassessed under part 4A, can still be subject to the GIC for up to four years. Further, the ATO will have to administer two systems in parallel for up to six years—the period it will take for the changes proposed to be fully implemented. Labor senators therefore consider that the SIC should apply to back assessments made from the date of royal assent to the bills and recommend that the bills be amended accordingly.

We will be moving some amendments in the committee stage to deal with some of the issues that I have outlined. One amendment that I will be moving will not be genuinely retrospective but will try to make it possible for those audited on recent returns to enjoy the benefits of the new regime. We would argue that amendments to give effect to some level of benefit for those who have been audited would reflect some of the comments that Senator Murray made on behalf of the Democrats in the committee process. Labor senators recognise that some people who have already been assessed and who have paid or are in the process of paying their tax debts under settlement arrangements may feel unjustly treated as they do now. It is administratively impractical to reopen such cases. However, and this will be reflected in later consideration, Labor senators will at least ensure that all assessments after the bills receive assent will benefit from the introduction of the SIC.

Labor senators were also concerned about the apparent conflict between evidence received from the ATO and Treasury and from the many persons and organisations that made submissions. The ATO evidence appeared to indicate that the mass marketed schemes issue had been settled and that all participants were offered favourable terms. This may be the case for many of the agricultural and franchise scheme participants, but it is of concern that there may be substantial numbers of other people who found themselves entrapped by bad advice in schemes such as EBAs and retirement home schemes who have not been offered realistic settlement terms. Many of these people have been ruined financially as a result, and there was substantial comment at the latest estimates in the questioning of the ATO again on this issue. It has been a running issue with the Taxation Office over many years.

Labor senators urge the ATO when making future settlement offers to be mindful of the policy intent in introducing the SIC and to ensure that the GIC is not applied as a quasi penalty in such cases. Labor senators, in their observations, concluded that changes should have been introduced earlier in order to minimise the concerns and the various ongoing problems. I think some 40,000 taxpayers would not have been suffering under the burden of crippling tax debts or penalties that have applied in many cases.

The other issue, on which I will conclude, is the future operation of machinery provisions relating to taxation involving more than one type of tax. Labor are concerned about this issue. We argue the government has shown a propensity to try to push tax law through the Senate with undue haste. Labor believe there is even greater risk of that after 1 July. Labor understand, and this is reflected in some of the more recent tax bills, that Minister Brough in the other place has had the carriage of a significant number of errors and mistakes. The Labor Party recognise that errors and mistakes can occur—they have been far too frequent, I have to say, on Minister Brough’s watch—but, if you make a mistake on a tax matter, own up. It is a complicated area. Do not stick out press releases, attempting to cover up your error and referring to enhancements, trying to bury them in either other tax bills via amendments or TLAB bills that subsequently have amendments added to them. Tax law is complicated. Where a mistake is made, there should be a frank admission of the mistake.

Obviously, the Labor Party, being the reasonable opposition that we are, understand that where those sorts of mistakes occur we should immediately have corrective action. The Labor Party are supportive of that. We do not blame public servants. Tax is a complicated area. Mistakes are made relatively frequently, despite the best intentions. There are advisers in minister’s offices. Ultimately, ministers are paid for this, they have to take responsibility, and they should own up and obtain the cooperation of Labor and other parties in the Senate to ensure speedy corrective action is taken.

As I have said, Labor argues that, after 1 July, with the government in a rush of blood with control of the Senate as well as the House of Representatives, it is more likely that tax bills might fall foul of section 55 of the Constitution, which requires each new tax to be in a new bill. Machinery measures for taxation are usually included in an assessment act and do not require a separate act. If a bill that was passed purported to be a mere machinery measure but actually constituted a tax imposition measure and became part of an assessment act, there could be adverse consequences. If this were to occur, under the second limb of section 55 of the Constitution the totality of the amending act would be invalidated.

There are many precedents confirming the need for additional scrutiny because of a failure to make corrective changes in the first instance. A good example is the consolidation regime, which was introduced in 2002 but which has now been amended 11 times. The consolidation regime, an attempt to simplify tax law in some areas, has now been amended 11 times. So a simplification effort becomes more complicated and we start to revert to the very complexity of the tax base that is being sought to be simplified. It is also true that international tax changes have been amended a number of times in the same way. So Labor are concerned about the number of errors in tax bills that are having to be corrected, and we are concerned that there will be an increased propensity to rush legislation forward in the tax area and for the number of mistakes, which has been on the increase, to increase further. We do not believe that that is a good thing.

When we get to the bill in committee we will be moving a couple of amendments that we believe are important in respect of the general interest charge. Over the last hour—I do not say unfortunately; it is part of the job—I have incorporated a number of speeches on two tax bills. We will deal with the second reading amendments on those bills in the committee stage. In order to save time, I have incorporated speeches on two superannuation bills—I was halfway through speaking on one. For this third tax bill, which I have been speaking on for the last 20 minutes or so, due to the very quick notice for the bringing on of this legislation in order to cooperate with the government’s program, regrettably I was not able to obtain the necessary composite material in order to submit the speech that I have just given. I have had to give it from notes rather than incorporate the speech; otherwise, I would have been in a position to save time. Nevertheless, I stress that the opposition has effectively cooperated by delivering speeches on the second reading on five pieces of legislation in the hour we have had in lieu of the dinner break.