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Standing Committee on Economics

HIRST, Mr Andrew, Representative, The Tax Institute

JEREMENKO, Mr Robert, Senior Tax Counsel, The Tax Institute

MURRAY, Mr Peter, Representative, The Tax Institute

REGAN, Mr Anthony, Principal Adviser, Business Tax Division, Revenue Group, Department of the Treasury

WANG, Ms Nan, Manager, Department of the Treasury


CHAIR: Welcome. Do you have any comments to make on the capacity in which you appear?

Mr Hirst : I am Director of Greenwoods & Freehills, representing The Tax Institute.

Mr Murray : I am a partner in KPMG, representing The Tax Institute.

CHAIR: Although the committee does not require you to give evidence on oath, I should advise you that these hearings are legal proceedings of the parliament and therefore have the same standing as proceedings of the respective houses. I will now give each group an opportunity to, if necessary, make an opening statement on schedule 2 of the Tax Laws Amendment (2012 Measures No. 2) Bill 2012 before we proceed to questions. After we have dealt with schedule 2, we will proceed to schedule 3.

Mr Jeremenko : I thank the committee for the opportunity to participate in this hearing today. The Tax Institute always welcomes the opportunity to publicly discuss important tax measures such as those proposed by the legislation before us. The Tax Institute is Australia's leading professional association in tax. We have some 13,000 tax professional members and we are the mark of expertise in tax. We set the benchmark for the most up-to-date tax professional education and development events in the country. That means that members of the Tax Institute are best placed to have the highest level of expertise in the field, which is why we are here before you today.

With regard to the legislation before us, as you mentioned, Madam Chair, schedules 2 and 3 are closely interrelated, so my opening comments will touch on both, without going into too much detail. I will leave that for questions. The Tax Institute strongly supports working within a framework of guiding principles when introducing tax laws in order to provide taxpayers with greater certainty in relation to their tax liabilities and affairs. Of these principles, the most fundamental is that legislation should not apply retrospectively except in very specific and exceptional circumstances. The application of this principle should not be dependent on the number of or the type of business or investment or tax profile of the taxpayers who may be affected by the amending legislation. So to reiterate: we do not recommend or support retrospective tax law amendments that may be disadvantageous to taxpayers for a number of reasons.

I will go briefly into some of those. Certainty in the law: taxpayers clearly enter into transactions on the basis of the law as it is on the day they enter into them, not the law as it may be rewritten at some time in the future after the transactions have occurred. As a result, retrospective changes that alter a taxpayer's tax liability are likely to disturb the substance of a bargain that had been struck between taxpayers who have made every effort in good faith to comply with the prevailing law at the time of the agreement. In addition, typically taxpayers undertake transactions based on what they consider to be known exposures to tax liabilities. Retrospective changes could give rise to unexpected joint and several liabilities for taxpayers.

Financial statements: many entities have prepared and issued financial statements which in this particular case before us, in schedule 3, may include the impact of rights to future income deductions that would change tax liabilities. Subsequent changes to these statements, as a result of retrospective legislative change, would have adverse implications for investors and capital markets that have relied on those financial statements.

Investment decisions: taxpayers have committed to investment decisions on the basis of a particular tax profile for a particular entity. Retrospective amendments to change such a tax profile, as these measures before us do, can materially impact on the financial viability of investment decisions and the pricing of those decisions.

Dividend policies: taxpayers have framed dividend policies based on profit levels, which in some cases have assumed rights to future income deductions. If the deductions are now disallowed retrospectively, there is the potential for adverse impacts on dividend policies, including available franking levels.

Advisory costs: taxpayers have incurred significant valuation and advisory fees in relation to the identification and quantification of the law as it is and as it will no longer be if this legislation passes. So those advisory costs would be rendered redundant.

We also note that the parliament, particularly the Senate, has on various occasions expressed reluctance to pass retrospective tax laws, except in very limited circumstances. I will draw the committee's attention to Senate standing order 24. I realise it is in the other place, but I believe that it really focuses the mind on why changes such as these are to be guarded against, except in exceptional circumstances. The Scrutiny of Bills Committee will adversely comment on legislation that unduly trespasses on personal rights and liberties.

The Senate Standing Committee for the Scrutiny of Bills has elaborated on that and 'will comment adversely where such a bill has a detrimental effect on people retrospectively'. Apart from the Commonwealth, this bill is for the benefit of those taxpayers. Indeed, that is not the case with respect to the legislation before us. Does the bill make more than a technical amendment or correct a drafting error? The bill before us does not. Does the bill implement a tax or revenue measure in respect of which the relevant minister has published a date from which it will start and publication took place prior to that date? No, not in this case.

The Tax Institute acknowledges that, in some cases, retrospective legislation is appropriate such as, for example, where an amendment will correct an error where taxpayers have not been acting consistently with that error or indeed to address significant tax avoidance. There is certainly the need for retrospective legislation in those cases. But while the circumstances for some parts of the legislation before us have been justified in terms of retrospective change and there are some minor elements, it is certainly not the case for the vast majority of the measures in this bill. It appears that the government has taken the opportunity to go far beyond those small measures where retrospective application is appropriate. As I have discussed, the outcome will be the cause of significant commercial detriment for a large number of taxpayers. As I said at the outset, I think questions will probably allow us to go into some more detail. My colleague Mr Hirst may like to make an opening comment.

Mr Hirst : We obviously had super first and now TOFA and consolidation interactions. Even for tax advisers this is pretty esoteric sort of stuff. With that in mind, it is fair to say that the TOFA and consolidation stuff is complicated. However, what I think we are talking about today is one particular specific retrospective feature, which really can be boiled down very simply. If you give me the indulgence, I will spend five minutes explaining the background which takes you to that point. The issue really arises in relation to financial arrangements where you have a consolidated group. A consolidated group acquires another entity, so you have a consolidated group A Co. that acquires B Co. B Co. has financial arrangements. The provisions apply to both assets and liabilities, but the real crux of the changes here is in relation to liabilities. B Co. has a financial arrangement that is a liability and, for ease of reference, the explanatory memorandum often refers to an 'out of the money' swap. I will just use that as an example. You have a derivative: an 'out of the money' money swap. Its fair value is $100 out of the money at the time of acquisition. Historically, what would have happened would have been that A Co. would have acquired B Co. Assuming that that liability was then discharged at a later point in time and assuming it was otherwise deductible and has satisfied the basic requirements under the tax act, then A Co. as the head company of that group would have got a deduction when it paid $100 out of that swap.

Those provisions have been changed. The announcement was made on 25 November 2011 and, in essence, it operates to effectively deem A Co. to have received an amount equal to the accounting value of that swap at the time when B Co. joined the group. So, in essence, it says, 'You're treated as effectively having received $100,' which means that if A Co. then closes out of that swap the next day and pays $100, A Co. will no longer get a deduction in relation to that.

I do not think we are here today to discuss the merits or otherwise of that. That is a decision that has been made. Some taxpayers will agree with that; other taxpayers will disagree with that change. But that is a change that has been introduced or will be introduced by these amendments. What we are particularly concerned about and would like to raise today is the retrospective nature of that change and, in particular, the fact that the retrospective application of that may be applied to only a number of taxpayers rather than applying across the board to all taxpayers. To put that into context—and these provisions have been worked on for the last several years, so they are pretty well-developed provisions—back in 2009-10 a new code was introduced for the taxation of financial arrangements, TOFA, in the legislation which essentially are for large taxpayers that meet certain thresholds. These provisions operate as the primary code under which the income tax system will recognise gains and losses in relation to financial arrangements, loans, swaps and other things like that.

When taxpayers went into that system, they were given a choice. For ease of reference I will use 1 July 2010 because that is the day that TOFA first started to apply for most taxpayers. When they went into that system they were given an option to elect to ungrandfather their existing financial arrangements. This was purely a compliance mechanism. They got a choice to ungrandfather so that they did not have to apply one set of provisions, these new TOFA provisions, to their new financial arrangements and an historic set of provisions, the old law, to all their financial arrangements that existed at that date. That was purely intended as a compliance measure, and I think that is reflected in various material.

Taxpayers made that choice back in 2009-10. A number of taxpayers elected to ungrandfather so they could just apply this single set of rules. When they made that choice they were completely unaware of this potential change in relation to these interaction provisions and in particular the consequences for liabilities. They then get to the situation when this announcement came out on 25 November 2011 and said that, 'As well as applying these provisions to knock out these deductions on an ongoing basis, we are going to apply these provisions to taxpayers that have elected to ungrandfather their financial arrangements.' For those taxpayers who elected to ungrandfather, they have to go back and say, 'If I bought B Co. in 2004, 2005, 2008 or 2009 and that swap is still in existence now I have to go back and have a look at what I did back in 2004, reset the tax cost of that swap'—which would be accounting value at the minus 100 in our example—'to that amount at that time.' That then means ultimately that when that swap is closed out they will no longer be entitled to that deduction. So rather than it being on a purely prospective basis, they have to go back and redo all these things and potentially lose the benefit of very valuable deductions that (1) they expected to get when they acquired B Co. back in 2004 or 2008 and (2) they still expected to get when they made a decision to ungrandfather on 1 July 2010.

There is perhaps one further point. In the most recent draft of the provisions that has been put before the House there was a further amendment that was made which said for certain other classes of taxpayers who received a ruling in relation to certain assets if they had a liability which was the same type as that asset then these provisions will not apply to them. Now we are in a situation where if a taxpayer has made this compliance and grandfathering election (1) they are in a worse position than taxpayers who are not subject to TOFA, because they still get the deduction, (2) they are in a worse position than taxpayers who are subject to TOFA but did not make this compliance ungrandfathering election, because they would still get the deduction because these provisions would not apply to their historic arrangements and (3) they are in a worse position than the other class of taxpayers who have been granted this further exception under the provisions. The main point we want to get across today is that we think that the particular class of taxpayers who made this compliance election are being caught in a worse position than all of these other people and that these provisions should not have a retrospective effect in relation to any taxpayers. You should not be distinguishing between taxpayers, especially if one is a taxpayer who has made an election which was intended purely as a compliance measure rather than as something that would fundamentally alter tax outcomes.

CHAIR: Mr Regan or Ms Wang, do you have any comments to make?

Ms Wang : I have a few. First of all, TOFA, the taxation of financial arrangements, is really about symmetry of tax treatment between assets and liabilities. You could have a financial arrangement that was at one moment an asset and then at the next moment became a liability because of the market movements—especially in relation to derivatives. It is important for the tax system to recognise the symmetry between assets and liabilities; otherwise you are going to have a gap in terms of taxation.

The second point I want to make is that there could be assessable income and allowable deductions with respect to a liability. Normally people think about liability as only deductions. When it is related to an out-of-the-money swap, the market value can move in a positive direction, which gives you an assessable income, or it can move in a negative direction, which gives you an allowable deduction. So there could be gains and losses associated with a particular liability. I think Mr Hirst is talking about a deduction in relation to a liability. That is only true if, in the period that we are talking about, the market moved against this particular derivative. If the market moved for this derivative in the same period, you could have unrealised gains. The resulting assessable income could be wiped out of the tax system as well. That is the second point.

The third point is about retrospectivity. TOFA is a very complex regime in the tax law and it is fairly new. I think at its introduction the government foreshadowed that, as we identify unidentified issues or the law does not achieve its original policy intention, further refinements through retrospective legislation, might be necessary. There was a sequence of press releases going down that path. Another special feature about TOFA is that, as Mr Hirst has foreshadowed, TOFA was developed over a long period of time in consultation with a lot of the industry players. I have only come into TOFA towards the very end, and what I have experienced is that the consultation has been much more intimate than with a lot of the other tax laws. That is the other feature of the TOFA law. Those are the few points I wanted to make.

Mr Hirst : Could I respond to a couple of those point—perhaps in reverse order. I agree there has been very heavy consultation in relation to TOFA generally. However, there are two points worth making. The first is that, at the time taxpayers were making their un-grandfathering election in 2010, taxpayers did not know that these provisions were going to apply in this way. The provisions were announced in November 2011, and there was little, if any, consultation at all in relation to those. A one-page announcement came out as attachment B of a press release. It is fair to say there was almost no consultation whatsoever in relation to that. Taxpayers tried to engage in that and, unfortunately, there has not been a great deal of discussion on it.

The second point was that there have been a number of retrospective changes made to TOFA. These changes have primarily been to clarify ambiguities within the provisions which could operate in two ways. Usually, the changes have been of a clarifying nature and there has been consultation on them. Typically, that has involved taxpayers going to Treasury and basically saying: 'These provisions aren't operating very well in this context. We don't think they were ever intended to operate in this way.' Taxpayers and Treasury have then worked very closely alongside the ATO and changes have been made, usually with agreement between all the parties—sometimes people have disagreed.

I think these amendments fall into a completely different category. There were various announcements made. None of those announcements, to my mind, related at all to these amendments. These amendments came as a complete, or a relatively big, surprise in November last year. Unfortunately, these amendments, unlike most of the other TOFA amendments, are penalising certain taxpayers rather than all taxpayers, and that really is the fundamental problem with the retrospective nature of the amendments.

CHAIR: Can we separate the two things for a minute—and I know for you they are probably not separate—into the actual amendments themselves and the retrospectivity.

Mr Hirst : Of course.

CHAIR: Again, as I understand it, we are talking about a number of principles which seem fairly obvious to me, that assets and liabilities are treated the same way.

Mr Hirst : We agree.

CHAIR: That you match the tax time frame to the accounting time frame in the reporting.

Mr Hirst : Absolutely.

CHAIR: In that sense what the amendments are trying to achieve looks to be a good thing, to me.

Mr Hirst : On a go-forward basis, I think that is fair, too. I think there is some logic to the amendments on a go-forward basis. Certainly you are absolutely correct in that TOFA recognises both assets and liabilities in a symmetrical way, so historically there have been a lot of problems with the tax system in relation to how liabilities are recognised, and there have been a lot of gaps. TOFA, essentially, is applying a single set of rules—often based off the accounting principles, depending on what elective method you have made under TOFA, but generally speaking—to both assets and liabilities.

CHAIR: So the issue we have, really, is between 1 July 2010 and 1 July 2012.

Mr Hirst : Unfortunately, the real consequence of these changes are for those taxpayers that ungrandfathered. The real consequence is in relation to the period from 1 July 2010 back to the time when the consolidation provisions were first introduced in 2002. So that is when the real problem arises. Those taxpayers have potentially been required to say, 'Have I still got a financial arrangement that I acquired as part of a historic acquisition?' And they are losing the benefit of tax deductions where taxpayers who elected not to ungrandfather are still entitled to claim.

CHAIR: Retrospectivity is one of those really interesting things. I am a musician by birth, so I do not think in a linear way. I have a different perspective of retrospectivity. If we can just talk through that. In 2002 the consolidation regime came in. Between 2002 and 2005—when it was reviewed by the Howard government, I think, and they made some recommendations—people would have assumed that it was going to continue in the way that was.

Mr Hirst : I think that is fair to say. As I did not come to the country until 2004, my knowledge of that period is limited. But I think that is fair to say.

Mr Murray : The 2005 issue is really for the schedule 3 point more than the TOFA point. That is why I am keeping quiet. I am schedule 3.

CHAIR: Okay. In 2005, there were some recommendations by the Howard government which were implemented in 2010.

Mr Hirst : These are completely unrelated to this TOFA issue. That is the schedule 3 stuff.

CHAIR: So it is a retrospectivity issue which you raised going back to 2002, which I will not address, then. We will stick to TOFA, which is 2009. When companies decided to ungrandfather—and that was the a new verb that was created; I will conjugate it later—did they do that purely for compliance issues or was there some tax advantage in grandfathering or ungrandfathering?

Mr Hirst : No, it was intended purely as a compliance measure. The real backdrop to that is that TOFA made two or three really fundamental changes to the tax system. One of those changes was that it potentially allowed you, if you made elections, to recognise tax gains and losses on an unrealised basis rather than a realised basis. They did that by, essentially, allowing you to recognise movements in the value of items in your accounts. So the problem you have is that, if I am a taxpayer and I apply TOFA and I stand there on 1 July 2010 and say, 'Every new loan or new swap I enter into I'm going to recognise on an unrealised basis, basically picking up fair-value movements in my accounts, which can obviously fluctuate,' I do not really want to be applying another set of provisions to my historic financial arrangements which are really saying that in relation to those I cannot recognise these unrealised movements; I still have to recognise gains and losses having regard just to payments that are actually made and what happens when things are actually closed out. So I am not able to pick up amounts from my accounts.

The sole purpose of the ungrandfathering election—and it is reflected consistently throughout the EM—was as a compliance measure which allowed taxpayers to simply bring all their financial arrangements within the scope of one set of provisions—that is, TOFA. Generally speaking, a lot of taxpayers that were big enough or had sophisticated enough systems chose to do that. A number of taxpayers, even though they were subject to TOFA, did not choose to make that election, having regard to their own particular circumstances, whether or not they felt they could monitor things and, in particular, what elections they were making. So some taxpayers that would be subject to TOFA would not actually recognise amounts on an unrealised basis; they would still continue to recognise them essentially on accruals or a 'paid and received' basis, even though they were subject to TOFA. So different taxpayers changed, but really I do not think there is any doubt that the ungrandfathering was never intended, apart from possibly in a timing sense—that is, allowing you to recognise things on an unrealised basis—to fundamentally create permanent differences—that is, by knocking out of the system the tax deductions which taxpayers would previously have expected to receive.

Ms Wang : Just on the transitional election—the ungrandfathering election—I have a few points to make. First of all, in relation to the vast majority of TOFA taxpayers which have made the election to match their tax with accounting what we call the fair-value taxpayer, financial report taxpayer or foreign currency retranslation taxpayers—what is in schedule 2 was the original policy intention. So there was no policy shift with respect to those taxpayers, and that was clearly spelt out in the EM and in the following consultations. In one of the consultations, with the banking industry, we actually said at the consultation that making this transitional election could potentially wipe out your permanent differences between tax and accounting. Therefore it is a purely technical amendment for those taxpayers.

The second thing I wanted to say is that, in relation to the purpose of the ungrandfathering, yes, we agree—and the EM has spelt this out clearly—that it is a compliance cost-saving measure, but there are specific measures in the ungrandfathering provisions which say that a taxpayer has to make the election very early on in their first TOFA year. That was particularly designed to prevent taxpayers from making a choice based on the tax liability differences, so that is to prevent it becoming a tax advantage or tax detriment. It was just trying to say, 'This is a compliance cost and a compliance cost only, and you're not supposed to wait until the end of the financial year to make the election with the hindsight of knowing what the tax outcome is.' So there are specific measures in the transitional election provisions preventing taxpayers making the election on the basis of tax outcomes. That is the second thing.

The third thing about what was announced in November 2011, which these amendments relate to, is that there have been consultations on the treatment of liabilities in the TOFA consolidation context. That was part of the tax office's National Tax Liaison Group TOFA Working Group consultation. I have participated in those discussions about whether the law gives the right outcome in terms of the treatment of liabilities in a TOFA consolidation context. That consultation was between March and June 2011. Of course, there was no consultation on the policy proposal prior to the announcement, but there was certainly consultation on the issues that potentially we have to address.

Mr Hirst : I think it is fundamentally incorrect to say that this is a purely technical amendment and that there was no policy shift in relation to the treatment of these liabilities under the pre-2010 arrangements. I completely disagree with that. I do not believe that is an accurate reflection. In relation to the consultation that took place, consultation did take place on various technical issues in relation to the TOFA consolidation interaction provisions. I was at the meeting that Nan referred to. There was two or three hours discussion on various technical issues. Right at the end of that meeting, for literally 10 minutes at the end of that meeting, there was an issue raised in relation to the potential for there to be a change in the way that liabilities were treated as part of a TOFA consolidation interaction. That was raised in the last 10 to 15 minutes of that meeting. Subsequently, there were no further discussions in relation to that before this one-page press release came out in November last year.

I agree completely with the other points Nan was making in relation to the intent of the transitional balancing adjustment and the ungrandfathering and it being a mechanical compliance based thing. There were various items in relation to that that were consulted on and there have been a number of issues with that more generally. The only point I really want to make is that, if you asked 100 taxpayers who elected to ungrandfather on 1 July 2010, I suspect that 99 of them would tell you they had no idea that these provisions could potentially apply to their historic acquisitions and that, if they thought that they could apply to their historic acquisitions and wipe out the value of tax deductions that they were still expecting to get, they would have had to think very, very hard about whether or not they made their election. So they made their election, in my opinion, on one basis, and subsequently found out that something they were expecting has been taken away.

CHAIR: I want to go back to Ms Wang's point that when those decisions to ungrandfather were made they were made from a policymaker's understanding that they were made because of the compliance issues, not because of whatever tax advantage or disadvantage there might be at that point.

Mr Hirst : Absolutely. There is a fair point there: you had to make them for the right reasons at the start of the year. So, depending on which way they move, you could accelerate deductions or recognise income quicker. But those were purely timing issues; they were not issues that actually knocked out deductions. Essentially, when you ungrandfather your financial arrangements, what that requires you to do is take a snapshot at that time of how your current financial arrangements were treated under the old law in comparison to how they would have been treated under TOFA. Whatever the difference was between those two things, you then had to spread and bring to account for tax purposes over a four-year period as either an amount of assessable income or a deductable amount. But that was purely a timing issue in relation to the recognition of that amount, rather than anything which altered the tax outcomes you were expecting.

CHAIR: This is where, I think, it bumps into schedule 3, and I am still trying to avoid schedule 3 for you.

Mr Hirst : It obviously is completely divorced from schedule 3.

CHAIR: I cannot see that it is, but you might be right so, when we get to schedule 3, you might enlighten me why they are not intrinsically linked. Again, the retrospectivity issue for you is that the company that ungrandfathered, or thought about it back in 2009, and did it in 2010—

Mr Hirst : It is easiest to assume 1 July 2010 although taxpayers could actually elect to go into the provisions a year early

CHAIR: Okay, 2010. They assumed at that stage that there were liabilities, if you like, dating right back to 2002 which would be treated in one way or another.

Mr Hirst : Correct.

CHAIR: Okay, fine. Can we go on to schedule 3? We can come back to schedule 2 if you need to. Do you want to make opening statements on schedule 3?

Mr Murray : It may be useful to put a bit of context around it. If you start to talk about 2005 and 2008, it might just do that. Consolidation commenced on 1 July 2002. During the period 2002-2005 the tax office looked at interpreting a particular provision and how to actually use the tax costs that are allocated to a class of assets called residual assets. That was difficult and I will use the term 'unworkable to a satisfactory position'. On 1 December 2005 a press release was issued that announced there would be amendments to that particular provision to give it some meaning and some substance in how to use that tax cost allocated to those types of assets. Then in May 2008 the current government said that it could go ahead with these changes. Between 2008 and 2010 we had an element of quite detailed consultation, which led to the 2010 amendments. Then in March 2011 it fell to the board of tax to look at that law that had been passed. Then we had the press release on 25 November 2011, and then the current bill we are talking about now. That is the context of schedule 3.

Particular issues that we have with the proposed amendments are in the area of retrospectivity, which Rob Jeremenko has introduced. There is appropriate retrospective law. I think part of the proposed amendments in schedule 3 are quite appropriate in clarifying that certain items such as customer relationships would be due to this goodwill and there would be no deduction in respect of those types of assets. Where I think it is not appropriate is going back some 10 or 12 years and denying deductions that taxpayers would have thought, or did think, were available given the combined effect of the December press release through to the amending law in 2010.

The way in which the law in schedule 3 has been introduced is in three periods. There is the pre-period, the interim period and the prospective period. There are issues with respect to each of those periods that are worthwhile commenting on. In the pre-period, which is prior to 12 May 2010—from 1 July 2002 to 11 May 2010,—that is the period where we did not have the law but, based upon the combined effect of the consultation and the 1 December 2005 press release, tax payers were aware that there were going to be amendments that would clarify that law, which ultimately came into fruition in the interim period, being 11 May 2010 to 30 March 2011.

The purpose of the interim period rules was meant to protect taxpayers. That was the law; that was what they should have confidence in. But the amendments in schedule 3 have gone beyond that and taken away deductions in respect of customer contracts that existed when an entity joined a sonsolidated group. This amendment has also been obviously extended into the pre-period as well. That has gone further than what was also expected.

In respect of the prospective period, the main point there with the retrospective element of the prospective period is that it is law that applies from 30 March in a period when, sure, everyone knew that there was investigation going on by the Board of Taxation, review and consultation but tax payers had no idea as to what the prospective period would look like. A more appropriate day I would suggest is 25 November 2011 as the start of that prospective period.

Mr Regan : Mr Murray is right about the history. The announcement back in 2005 covered some specific types of deductions, namely for consumables and works in progress. That is basically unbilled income. Between 2005 and 2010, when the legislation to implement that was introduced, there was a broadening of things that came within the provision that was introduced. It was decided that giving the benefit of that broadening to people retrospectively goes too far and that it would have a significant impact on revenue. The announcement does preserve the treatment that was announced in 2005 for consumables and works in progress. The legislation recognises that in all three periods. As I say, the primary reason for introducing the pre-rules, as we call them—the pre-May 2010 rules—is to protect the significant amount of revenue that would otherwise be at risk because people are able to take advantage of the retrospective changes that were made in 2010 in an unexpected way. We are talking about revenue in the order of $6 billion, so it is very significant.

The interim period rules apply from the date the legislation was passed by both houses of parliament until the date that the then Assistant Treasurer announced the Board of Taxation would undertake a review of the rules. They are largely designed to protect taxpayers who entered into arrangements based on the law that was in place at that time. I accept that there are some modifications to the law. Those modifications are largely consistent with recommendations that were made by the Board of Taxation to clarify those rules for that period. The prospective period rules, to a large degree, are consistent with some recommendations that were made by the Board of Taxation. Again, there have been refinements to those recommendations during the development of the changes. The prospective rules apply from the date that the government said it would review the operation of the rules.

CHAIR: The 2010 changes were retrospective. They were not disadvantage but advantage retrospective. I assume there is general agreement that they went further than was expected in the 2005 review.

Mr Murray : The 2005 press release gave examples of consumables and works in progress, but it was not an exhaustive list of what would be eligible. Getting to the 2010 amendments there was extensive consultation. There were extensively worked examples of the types of items that were thought would be covered by the rules. That was confirmed and they were reflected in the explanatory memorandum as well.

CHAIR: Nevertheless there have been quite extensive unintended consequences in terms of the way that people have claimed. So is it reasonable, given that the changes were retrospective in the first place, that the winding back of those changes also be retrospective?

Mr Murray : Some of the items where deductions were sought, I agree, did go beyond what was expected. There was the example I gave of a customer relationship. That clearly should be wound back and treated as nondeductible. We have no problem with that. Our concern is about the other items that were specifically covered in the explanatory memorandum as eligible that have also been wound back. One particular example is contracts. The changes have affected both the pre-period as well as the interim period where there are valuable contracts to provide services to customers. They have been in certain cases eliminated from being eligible for deduction as well.

CHAIR: It is desirable that there be consistency in the tax system between companies that are in a consolidation regime and companies that are not. Do these changes bring consistency to those two groups or do they introduce a different set of rules?

Mr Murray : No, I think the net effect of the rules is to create differences between those within consolidation, say if you are doing an acquisition based upon buying assets—assets and liabilities. Remember we are talking pre and interim. That is a bit hard, because you did not have that choice, but let us say, with respect to the prospective period, there would be in a number of cases a skewing towards buying assets rather than the entity, if you were looking just at the tax consequences of the costs associated with acquiring those assets.

Mr Regan : One of the issues that the Board of Taxation raised and was concerned about was that the 2010 amendments did bring in a specific deduction that was available only for consolidated groups. The board emphasised that, in its view, consolidated groups should only get deductions that are available for all other taxpayers. So, under both the pre rules and the interim rules, there still is a specific deduction that is available only for consolidated groups; but under the prospective rules that has been removed, so you revert to deductions that are available for other taxpayers.

CHAIR: And the specific items that you have concerns with are in your submission.

Mr Murray : Yes. I guess I was only saying , with respect to the prospective period, that is a matter that will ultimately be decided in court cases into the future as to whether that is correct. The effect of the prospective rules is to push a lot of this thing called allocable cost amount that you push down to the underlying assets into goodwill. If you had bought that business as just buying assets, whether the same result will arise will be open to interpretation into the future. I do not think you can say that definitely that is the case.

CHAIR: Can I go back to retrospectivity, which I tried to introduce in schedule 2, but I will now go to schedule 3. Again, retrospectivity is an interesting thing. Between 2002 and 2005 they would have been operating as they expected it to continue.

Mr Murray : Yes.

CHAIR: So whatever was happening between 2002 and 2005, if there were changes in 2010 that affected that, that is a windfall gain. There were no decisions made between 2002 and 2005 that—

Mr Murray : That is not necessarily the case. It is then up to taxpayers how they applied those rules. Between 2002 and 2005 that is probably right; that would probably be conservative. Once the press release came out and there was discussion and consultation, where there would not be rulings but there would be discussion, taxpayers may have taken a treatment that may have reflected the 2010 amendments.

CHAIR: Yes, and I would have expected that between 2005 and 2010, there would be some but not all taxpayers would have made the judgments that they make.

Mr Murray : Yes.

CHAIR: Then again, my understanding is that in 2010 the amendments went further than the expectation.

Mr Murray : Yes. Some of the examples did, I think, go further.

CHAIR: And again my understanding is that the changes now—and not in all cases but in most cases—take it back to where you would have expected it to be in 2005, in 2010.

Mr Murray : Definitely not in all cases.

CHAIR: Not in all cases, I know, but in most cases.

Mr Murray : To be honest, I would say 'some'. 'Most' is saying majority, and I do not think majority.

CHAIR: Which cases do you think it does?

Mr Murray : Things like customer relationships—those which are really goodwill, where there were, I think even ATOIDs that were asking questions about customer relationships, were they deductible—those would be going too far. They have been brought back, and that is where I say the retrospective law to clarify that they are not eligible and they should be treated as goodwill is good.

CHAIR: And the bits that are not?

Mr Murray : Things like contracts. That is the one particularly that I see is going further. Where you have a valuable contract, the deduction in respect of the value attributed to those contracts is not available under schedule 3.

CHAIR: Again I ask, does that bring it in line with other tax payers?

Mr Regan : There are a couple of issues. Firstly, consolidation differs from other tax payers because you go through a process where you reset the tax costs of the assets of an entity that joins the group. So you identify all the assets and substitute an historic cost for a new cost, which is based on the cost of acquiring the joint entity. In a lot of cases in consolidation you are getting tax costs allocated to assets that otherwise would not have a tax cost or would have a very minimal tax cost. These contracts are an example of that kind of thing. Firstly, inside consolidation you are getting much more value put onto these things, which is giving significant deductions as a result. Secondly, outside consolidation, it is not that common to be purchasing contracts of this type. I am not saying that cannot happen. If it did happen, you may get a different outcome in respect of the pre-rules, but it is a relatively unusual event.

Mr STEPHEN JONES: Are you saying it distorts normal business behaviour?

Mr Regan : Ordinarily, you would not take over someone else's contract that is the key point here. It can happen but consolidation systematically does that.

CHAIR: Does it happen because there is a consolidation regime?

Mr Regan : Consolidation effectively treats you as acquiring the joining entitie's assets which include these types of contracts and it gives you a cost for those assets, roughly speaking, based on an approximate market valuation of those assets.

Mr Murray : The whole purpose of the asset base model of consolidation is to re-establish a cost base in assets. The fact that it goes from a nominal amount to a market value is just how it works. I am happy to spend more time on that.

CHAIR: I got it halfway through the first sentence.

Mr Murray : The second point is that in some industries contracts are the business. You can have in your business a number of customer contracts. And if you wanted to increase your business then you might buy a small player that has one or two to add to your portfolio of contracts, and that can be in many industries whether it is managed funds type industries as a manager or a transport company.

Mr STEPHEN JONES: It could be professional services.

Mr Murray : It could be any contracting service, you are right.

CHAIR: I will go back to the retrospectivity issue and how it affects companies now. I can understand all the reasons why the government would want to make these changes for the future. They seem quite sensible. Can we go to the issue you raised before, Mr Jeremenko, about companies now having built into their balance sheets assets and liabilities based on one scenario and people making decisions to invest in them or whatever. Can you talk a bit more about that and how that will unfold over the next couple of years if these bills go through.

Mr Jeremenko : I will ask Mr Murray to fill in the details of this as he deals with this on an almost daily basis.

Mr Murray : Again, there are many scenarios here. Some have processed these deductions through their tax returns and have reflected these deductions in the financial statements so they have to restate those financial statements, especially public companies. I have no idea how many are in that boat but that will require some explanation in the financial markets as well. There will be some who have requested amendments to their returns or who will lodge objections so they are in abeyance at the moment. We spoke about those in our submission as well. A number of those have not been processed yet. So the immediate effect may be minimal: they just do not get their refunds and presumably they have not reflected that in their accounts because they have only made a submission. Some may have to then refund tax or pay further tax, because they have processed these amendments within an amendment period. There will be a multiple of scenarios that various groups will have to process.

CHAIR: And those scenarios could be up or down?

Mr Murray : Generally, it will neutral or down, meaning giving money back in that sense. There will be few that might get some deductions but the way the law is drafted it will be minimal to nil.

CHAIR: It always seems to be the way of it, doesn't it?

Mr Murray : It does.

Mr Regan : Under the announcement, people who have received a refund of tax from the ATO will generally be protected from the changes unless that refund relates to something that is completely outside the intended scope of what anyone should have contemplated, such as the customer relationship example. But the general proposition is that, if people have actually received a refund of tax, then that issue will not be reopened.

CHAIR: And people who have got a ruling, of course.

Mr Regan : People who have a ruling, similarly, the view is that they have gone to the commissioner and the commissioner has applied his mind to it and given an answer, and they will similarly be protected.

Mr Murray : You would be lucky to have a handful of those, I would suggest.

CHAIR: Of rulings?

Mr Murray : Yes.

CHAIR: Okay. I did read somewhere that there were a lot of people that asked for rulings and there is a bit of a queue. I do not know if that is right or not.

Mr Murray : That is right. It is either going to be a ruling with process or more particularly with amendments and objections, but definitely those three categories are there. The tax office has held off on deciding those, because essentially in March it went into the Board of Taxation review and since then nothing much has moved.

CHAIR: So the main difference in treatment among the groups is between those who ungrandfathered and those who did not?

Mr Murray : Yes.

Mr BUCHHOLZ: I am sorry for my delay this morning. I left home at two o'clock with every intention to be here an hour before the committee started. This morning I was a victim of Canberra fog. I have been in a holding pattern over Canberra for a number of hours, and so my apologies. On behalf of some of my colleagues who cannot be here I have a series of questions. I will just read the list of questions and you guys can try and fill in the blanks for me.

I will start with a short statement. Last year's MYEFO stated that the government's announced changes to the consolidated regime had no revenue impact, but will protect a significant amount of revenue that otherwise would be at risk over the forward estimates period. The first question is: do these changes only address issues that arose from the amendments bill made in 2010?

Mr Regan : The changes in the bill modify the changes that were made in 2010. They certainly do things beyond what perhaps was contemplated in 2010. Certainly, in the prospective period they are making some more fundamental changes, which are aimed at trying to address some of the difficulties that emerged as a result of the 2010 amendments. One of the key problems from the 2010 amendments is that, with this consolidation tax costing process, some taxpayers revisited the assets that they were identifying for consolidation purposes. They started in particular to identify a range of intangible type assets, which are not generally recognised under the tax system. The difficulty with that is that, where such assets are not recognised under the tax system, they get allocated a cost. Taxpayers reasonably seek to find a way to deduct that cost. Under the prospective changes a key change is that under consolidation you only recognise assets that are ordinarily seen by the tax system and therefore there will be a way to deal with them. That is where they differ.

Mr Murray : What was interesting was that in around 2005—I may be corrected on the year—new accounting standards came in, the IFRS, which required on acquisitions businesses to break down their goodwill. Typically you do not because there is no particular reason to do so. It was coincidental that at that time there was the need to break down goodwill into various intangibles at the same time we were doing a push down.

Mr BUCHHOLZ: At the time the banking sector was saying it did not want to finance goodwill any more.

Mr Murray : Yes, accounting required financial statements to be broken down and amortised and at the same time we were doing the push down of ACA into assets. Then all parts came together. In one sense it was coincidental. I agree with Tony it was not normally done, but at the time it came into effect it was driven by financial reporting statements.

Mr BUCHHOLZ: I heard you speaking about public consultation as I arrived, so forgive me if I am duplicating questions. Was there public consultation on the 2010 amendments?

Mr Regan : Yes, there was an extensive consultation process. Exposure draft legislation was released in about 2009, from memory. In addition, there was an ongoing consultation process with the tax professional bodies. It was a very extensive process.

Mr BUCHHOLZ: What were some of the bodies that were involved?

Mr Regan : The main bodies who displayed an interest in consolidation are tax professional bodies—the Tax Institute, the Institute of Chartered Accountants in Australia, CPA Australia and the Corporate Tax Association.

Mr BUCHHOLZ: Do these changes relate to the government's amendments to the bill which were introduced in 2010?

Mr Regan : The amendments which were introduced in 2010 arose because it was identified shortly after introduction that these provisions could create some risk to revenue. The 2010 amendments attempted to constrain that, but did not go far enough. These amendments are basically about the same issue and go a lot further.

Mr BUCHHOLZ: Have you reviewed why these issues were not recognised prior to the final passage of the bill in 2010?

Mr Regan : Treasury has undertaken an internal review of its practices to see if we can make improvements as a result of this exercise. As a result, we have modified our quality assurance processes and introduced enhanced consultation arrangements with the ATO. In developing these changes, the government asked the Board of Taxation to review the issues to identify any problems that were emerging. Once the government was given the report from the board, it undertook an extensive consultation process with a working group of tax experts, including representatives of the same organisations involved in the earlier consultations.

Mr BUCHHOLZ: When were you first made aware of the revenue risk?

Mr Regan : The fact that problems were arising started to emerge towards the end of 2010 when the tax office brought to our attention that significant claims were coming in. Early in 2011 the Board of Taxation raised concerns directly with the government that it thought that some activity that was happening was undesirable. That is what led the government to undertake the review and see if it could establish the concerns being raised.

Mr BUCHHOLZ: Can you explain the quantum of revenue risk? Did you say that was $6 billion?

Mr Regan : Yes, it is a little in excess of $6 billion.

Mr BUCHHOLZ: What portion of the risk relates to retrospective application of the measure and what portion relates to prospective application?

Mr Regan : The risk to revenue relates to the retrospective changes to the law. The prospective changes are not expected to have a significant revenue impact, primarily for the following reason. I mentioned that under consolidation you go through an exercise of resetting the tax costs of assets. To do that you work out the allocable cost amount. In the basic case, the allocable cost amount is the cost of buying a joining entity's shares plus the value of the joining entity's liabilities. There are several adjustments to that, but we will not go into that detail. The amount that is allocated is not changing. Certainly the assets which it gets allocated to are changing, but the amount that is being allocated is not changing, so the view is that there is not going to be a significant revenue impact as a result of that.

Mr Murray : The only comment I would like to make to that is that it may even have a positive impact because the way this bundle of ACE—that will be allocated to goodwill—is released over time may delay its recognition. In other words, if you sell, or a business which is part of the consolidated group stops carrying on that business, there may not any release of that goodwill and realising a capital loss. So, it maybe the opposite—it may actually be positive to what you would have realised before those prospective rules.

Mr BUCHHOLZ: You may have already have had a crack at this next question. Are you aware of any taxpayers who will have increased tax payments arising from the retrospectivity of these changes? How many taxpayers do you expect will have to amend previous returns? I know you could not get close to it, but surely, if you know what the number is—$6 billion—you must be able to. I am not going to hold you to it. Just get me to the nearest 100 or 1,000. Just give me a ballpark figure.

Mr Regan : I do not have information about the number of taxpayers affected. A lot of these claims are very large claims; a lot of them are coming from the largest groups. I can give you a bit of an idea of the number of consolidated groups. The revenue data is based on claims from about 60 groups.

Mr BUCHHOLZ: What would they be? Would they be major groups?

Mr Regan : Yes.

Mr BUCHHOLZ: On the coalition side, we do have a fundamental opposition to most things that are retrospective. I do not suggest that this part of it is something that we would be doing backflips over. Do we have to make it retrospective?

Mr Regan : Obviously, that is a matter for the government. I can only go back to the reasons why the government considers that it needs to be retrospective, which is that it is taking away the unexpected and unintended retrospective benefits of the 2010 changes to law and is necessary to protect a very significant amount of revenue that is otherwise at risk. As I said, that is somewhere in the order of $6 billion.

Mr Murray : What is an interesting comment though is, if the law that was introduced in 1 July 2002 had been as the 2010 version or close thereto the total would have been the same, but the problem in the sense of the quantum is that it is a catch-up, because it is 10 years of transactions that have culminated in $6 billion or whatever the number is. That is why it looks so lumpy and it is lumpy, but it is a catch-up.

Mr BUCHHOLZ: Are you saying that there is a degree of ambiguousness in the marketplace where businesses may have a soft assumption that this was coming anyway?

Mr Murray : Yes, we covered that question earlier.

Mr BUCHHOLZ: I do apologise for covering any of that ground.

CHAIR: It was actually the Howard government in 2005 that flagged the changes which were implemented in 2010 and retrospectively to 2002. I assume that lots of companies went back and did all those things that they hate doing so much because they thought there was some money there. They went back over all of their accounts to 2002 and made adjustments. Is that correct?

Mr Jeremenko : That is correct. Both those changes were to properly recognise rather than—the term winfall gain was used before—it being a case of windfall gain. It was a case of allowing those companies to appropriately treat expenses that had been incurred by other companies they were acquiring.

CHAIR: I only used that term in that between 2002 and 2005 they probably were not expecting it. After 2005 they would have been.

Mr Murray : I have even heard of examples—consumables is the most obvious one, and that is clearly acceptable—where groups did not even claim that because they did not know how the rules were going to work. Some groups were just very conservative and did not claim until it became clear, and still may not have because it has been a little unclear over the last 12 months. Yes, there are claims there that have probably not even been made yet.

CHAIR: The first step in a sense seems obvious in that the change was made in 2010 retrospectively. If the change went too far, it seems the obvious thing to do is to retrospectively put it back again. Between the first action and the second action, companies have done things and made decisions.

Mr BUCHHOLZ: Is there a chance that with this liability being actioned, with an amount of $6 billion, there would be businesses operating in the market that would no longer operate once that liability came on?

Mr Regan : These are claims that have been made. They are not claims that have been processed where money has been refunded to taxpayers. Where taxpayers have received money from the ATO then they will essentially be protected from the changes, except in a very unusual circumstance.

Mr BUCHHOLZ: I am thinking of a retrospective claim. The company gets the liability and they have to repay the tax office. Is that correct?

Mr Regan : No. What companies are seeking is an amendment to their assessments to get a refund from the tax office.


Mr Murray : Tony, in terms of your comment, 'Are they protected?' there still is the ability—correct me if I am wrong—for the ATO to open up those assessments.

Mr Regan : Retrospective legislation, at least from the date of announcement, is quite common, so there is a standard provision that is used by the Office of Parliamentary Counsel which allows the commissioner to reopen assessments beyond the normal four-year period in order to give effect to law. That is the provision that is being used here. It is needed because where taxpayers have a claim for something like consumables, that will be allowed in all periods and therefore the commissioner needs to be able to sometimes extend the amendment period to give effect to that. I agree that technically the commissioner could go beyond that but that certainly is not the intention.

CHAIR: There was a lot of consultation back in 2009 and obviously you guys were consulted.

Mr Hirst : Sure.

CHAIR: Were you in the country then?

Mr Hirst : I was.

CHAIR: So you were all here. Did you foresee the problem that we are having now with these deemed liabilities? Did you foresee that or did it really come out of the blue for you, as well?

Mr Murray : Once the amendments were drafted and passed through parliament, no, I did not foresee that it would be going back. We would not be in this position, put it that way. Do I think some would test the water? We could see that that was happening but, as I said, the retrospective law to deal with some of those claims that are really goodwill, I think, is good law and that is appropriate. To the extent of where we are today, did I foresee that? No.

Mr Jeremenko : If I could add, Mr Murray is in a unique position in that he has been representing the Tax Institute in this area of consolidation since 1999. The open consultation and public discussion, as you mentioned, for the 2010 amendment was fully informed by associations such as ours. We can speak only for ourselves, of course, but the information we provided in terms of the effect of the proposed amendments at the time did not throw up any of the issues you were asking us about and as Mr Murray was just confirming. It brings me to consultation and the question earlier about the openness of the consultation around 2010. Yes, it was extensive. This bill was exposed for two weeks before it was introduced some two weeks ago. Yes, there was discussion last year of a confidential nature about how the government may amend, but there was no detail around that. There was no draft legislation. We had a lot of discussion about how we might make this policy decision workable and obviously, from the tenor of our comments today and our submission, we still do not think it is there. But the retrospective nature of it was not consulted upon. The government had said in those confidential discussions last year, 'This is what is going to happen and will you professional bodies come along with us in a confidential way to help us make this happen legislatively.' We were happy to do that while saying all along that we disagree with the effect of these changes which go back to 2002 in some cases.

Mr STEPHEN JONES: When you say that you are in the dark to some extent, you were aware of the Board of Taxation report in May 2011 which broadly set out the direction that has informed these bills today. That is correct, isn't it?

Mr Jeremenko : Correct, we were informed of it when it was released in May 2011 under the auspices of the confidentiality agreement.

Mr Hirst : I have just one point. The Board of Taxation, I think, actually specifically looked at liabilities generally and made several recommendations. They basically said, 'We need to look at this in a lot more detail,' and they effectively said that across all liabilities. It is fair to say that, in relation to the treatment of the TOFA liability stuff, there was no substantive consultation on that and a decision was made to apply that with retrospective effect which I am not sure is consistent with either the board recommendation or any stakeholder discussions that took place.

Mr STEPHEN JONES: Chair, can I put that to the Tax Office about consistency and inconsistency with regard to the board recommendations?

Mr Regan : The board made a recommendation that the issue of liabilities needs to be looked at, but the context of that was non taxation of financial arrangement liabilities and that is an exercise that the board is currently undertaking.

CHAIR: I come back to your answer, Mr Murray, that because of the retrospective nature there will be companies that will have to make statements about their balance sheets and all sorts of things. Did they have to do that also in 2010 after the amendments went through which were retrospective back to 2002?

Mr Murray : That would usually just be taxed. They would be processing a tax adjustment of some sort, so it would not be correcting their financial statements. It would just be in the normal course that you would either process a deduction, lodge your objection. The process would reflect the current year's accounts and then it would be in your financial statement. What I am suggesting in terms of process is that, if this law came through and business had already reflected the tax benefits associated with these deductions and the deductions were not here, they would have to undo those. So the two scenarios would be different.

CHAIR: I still do not understand why they would be different. Both of them are retrospective laws which changes your tax liability.

Mr Murray : But you have not claimed a deduction up to 2010. That was the general scenario and, if you had claimed a deduction, then the law clarifies whether that deduction was available, so there would be no need for an adjustment. They are the two broad scenarios, I would have thought, unless you can think of anything else. You either have or you have not. If you had, then your position is now cleansed with the new law with the 2010 amendments and, if you have not, then you would. That would be reflected in that current year's accounts.

CHAIR: Okay, but you did not have a concern with the retrospectivity in 2010.

Mr Murray : Not from a financial statement perspective. There were some public announcements made but usually they were beneficial because they were deductions that were then allowable so they would not upset that financial position.

Mr STEPHEN JONES: That goes to the nub of it really, doesn't it? You are not going to be complaining about retrospectivity if it provides a benefit even if that benefit is a windfall unintended benefit.

Mr Murray : Even if it wasn't.

Mr Jeremenko : If I could just add, that goes to the sort of statements that the Senate Select Committee of Bills was making around retrospectivity not being a problem if it is actually of benefit to taxpayers. I do not think anybody would disagree with that. You are not trespassing on rights and liberties by doing that. I will just point out once more that the 2010 amendments were not a case of giving a windfall gain to those companies. It was appropriately recognising and correcting the tax law for not recognising acquisition costs leading up to 2010. That is why the government announced it in 2005, and this government confirmed that and enacted it in 2010.

CHAIR: Any more? Okay. Would you like to make closing statements, at all?

Mr Jeremenko : Just to reiterate that retrospectivity, as we have seen today in an already complex area of the tax law, and the mere notion of retrospectivity, whether it be beneficial initially and now not of benefit to tax payers, multiplies complexity a number of times. In addition to that, the trespassing on the rights and liberties of the taxpayers themselves means that a government decision to enact tax legislation retrospectively needs to be made seriously and only made in exceptional circumstances. Revenue reasons—if this legislation proceeds—can be added to the list of special circumstances, which we think is inappropriate.

Mr Hirst : Could I just have one final comment as well? If you can, when you are considering these issues, divorce schedule 2 from schedule 3; I think that is sensible. There are fundamental differences in the way they have developed and in the nature of the retrospective changes. The TOFA stuff was genuinely a complete surprise that came to taxpayers in late last year and is unfairly penalising certain taxpayers who chose to ungrandfather. Even for those that chose to ungrandfather, there was only a limited class of them because of exceptions being granted for certain taxpayers that chose to ungrandfather. I really struggle to see from a policy perspective how you can hurt those particular taxpayers or what the differentiating factor is and why that is logical. I think that the other stuff in schedule 3, to be fair, has been a journey that has gone on for a very, very long period of time. Whereas the schedule 2 stuff has never been on that journey. It is a pretty straightforward issue. I genuinely still completely struggle to see the logic of the way in which different taxpayers have been differentiated.

Mr Regan : Could I just point out that the Assistant Treasurer recently gave an address to the Tax Institute New South Wales fifth annual tax forum where he spoke about retrospectivity. One of the things he said was that beneficial retrospective tax changes that go too far carry with it the risk that the government will need to subsequently introduce adverse retrospective tax changes. The consolidation measures are a good example of this. The key reason why the amendments announced in 2011 needed to be retrospective was that the beneficial 2010 amendments were also retrospective to 2002.

CHAIR: Thank you for your evidence here today. You will be sent a copy of the transcript of your evidence, to which you can make corrections of grammar and fact. You took me back to my student years. I have to say, reading tax law is not as complex as reading an open orchestral score. It is actually not as much fun, either.

Proceedings suspended from 11 : 58 to 12 : 45