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28. Chapter 22 Income Tax Administration

22.1. This chapter deals with a variety of matters which relate to the administration of the Income Tax Assessment Act and which have been made the subject of a number of submissions to the Committee. Section I deals with legislative, appeals and prosecutions aspects, Section II with procedures and taxpayer compliance, and Section III with payment of tax.

I. Legislative, Appeals and Prosecutions Aspects

The Commissioner's Discretion

22.2. A number of submissions have been received by the Committee which relate to certain powers which the Act vests in the Commissioner by some such language as enables him to make an assessment where he is ‘of the opinion’ or ‘is satisfied’ that a certain state of affairs exists. These may be conveniently referred to as the Commissioner's ‘discretionary powers’.

22.3. The tenor of these submissions is that, whenever possible, the use of a discretion in the Commissioner should be removed and liability to tax should be determined upon clearly defined criteria; that a Court should be able, in the same way as a Board of Review, to review the exercise by the Commissioner of a discretionary power, and that, where the Commissioner exercises his discretion, at the request of the taxpayer he should within some stipulated time furnish a statement containing his reasons for the exercise of the discretion.

22.4. Submissions have also been received to the effect that a system of advance bulletins should be set up indicating the matters which the Commissioner would take into account in the exercise of his discretion. These and a number of related matters are discussed below and certain recommendations made.

22.5. It must be at once conceded that the ideal for all fiscal laws should be certainty so that the taxpayer can discern from them the precise limits of his liability. An examination of the legislation of many countries—Australia is by no means unique in this regard—reveals that in many respects this goal has not been achieved. The failure to achieve simplicity and precision in every aspect of a taxation statute is readily understandable. Tax is levied over the whole community and upon all manner of persons and bodies. The fundamental basis of its imposition is the ability of each to pay, a difficult objective to achieve in view of the infinite variety of circumstances which attends even those with comparable grades of income. When the sources of income which range so widely have to be taken into account, the problems confronting attempts to achieve certainty in a law, which must at one and the same time have a general application and also as far as possible aim at equality of burden for each taxpayer according to his particular situation, are compounded. This will be recognised by anyone who attempts to reduce a taxation concept into statutory terms.

22.6. As all would readily agree, individual legislative treatment is an impossibility. The only practical means, on the one hand, of coping with the cases of hardship and of providing an equitable result for the inevitable departure from the norm so that the Revenue should not obtain more than in all fairness it is entitled to and, on the other, of ensuring that at the same time the taxpayer should not, at the expense of his fellow


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taxpayers, escape payment of his just liabilities, in many instances is by the exercise of a discretionary judgment to reach the solution called for by the particular circumstances of the case. The possession of a discretion by the Commissioner does not mean that he is completely at large in its exercise. It is not his private opinion that he is to express. He must act according to law and reason and to the justice of the case and not arbitrarily or capriciously or upon inadmissible or irrelevant grounds.

22.7. Another obstacle to simplicity and certainty in taxation legislation is the ingenuity and complexity of schemes which are evolved for the purpose of tax avoidance. By the use of documents and the adoption of procedures to which the Courts are impelled to give an operation according to their legal effect, it has become a not too difficult matter for some who have access to highly skilled advice to avoid a situation which the statute intended should be either taxable or taxable upon a higher scale. Some reference to this has been made in Chapter 11 (paragraphs 11.5–11.6) in dealing with the subject of income-splitting. The vesting in the Commissioner of powers of discretion, opinion, satisfaction and determination in this field is regarded by the Committee as a more satisfactory alternative to both the Revenue and the taxpayer than lengthy and complex provisions which can themselves be infected with the vice of uncertainty. It should not be overlooked that a power of this kind enables the Commissioner to give just recognition to transactions which bear the stamp of a genuine ordering of affairs and to separate them from those of an artificial nature designed to shelter their real purpose of tax avoidance. As both types of transaction frequently follow so closely the same path, the task of framing a definition which will include one without excluding the other usually presents insuperable obstacles for the draftsman.

22.8. It is admitted that in view of the number of cases arising the Commissioner's discretions must be exercised on his behalf by his officers who have delegated powers. But the Committee is informed that there are procedures established within the Department to ensure that, so far as possible, like treatment in the exercise of discretions is given to all taxpayers.

22.9. Whenever the law gives a discretion to the Commissioner, it should at the same time indicate the principle to which the Commissioner is to give effect in the exercise of the discretion: if the principle is not otherwise evident, it should be possible to infer it from any guidelines included in the section giving the discretion.

22.10. Accordingly, whilst the Committee has a definite preference for certainty in a fiscal statute it is not a sound practical measure to remove from the Commisioner's jurisdiction all the discretionary powers which he possesses under the Act. Where it is appropriate so to do, it would be an advantage for guidelines to be inserted in the Act to indicate the matters to which regard should be paid in the exercise of a discretion. But, as it is not possible to formulate guidelines to cover all the possible circumstances of every case, in the interests of the taxpayer as well as the Revenue, they should not be framed in the Act as the only relevant matters which the Commissioner should reasonably be entitled to take into account in the just exercise of the particular discretion vested in him. The proper exercise of a discretion necessarily involves a latitude of choice according to the particular circumstances of each individual case.

22.11. It has been submitted that whenever the Commissioner forms an opinion, makes a determinaton or exercises any like power, he should supply the taxpayer with the reasons or grounds upon which he has based it. As desirable as this might appear in theory, it would throw an enormous burden on to the administration and cause delay in the issue of assessments. Comparatively few of the Commissioner's actions of this nature are made the subject of challenge and, when an objection is made to an


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assessment, the Commissioner's reasons are placed before a Board of Review (see later) which in turn makes its own determination in reviewing the reasons of the Commissioner in light of the facts and the arguments of the taxpayer.

22.12. The Committee recommends that greater use be made of the procedure of the issue by the Commissioner of Public Information Bulletins setting forth the general guidelines which the Taxation Office usually takes into account in the exercise of powers of this nature in their different settings in the Act; but it should be made clear that such Bulletins are published for general information only. Because there will always be the exceptional case and because the facts of one case will rarely be on all fours with another, Public Information Bulletins should not be treated as evidentiary material before a Court or Board of Review.

22.13. The protection which the taxpayer has against any error made by the Commissioner in the exercise of these discretionary powers is the review and appellate provisions in the Act. Where the taxpayer is dissatisfied with a decision of the Commissioner disallowing, either in whole or in part, his objection to an assessment he may, within sixty days after service of the Commissioner's decision upon him, request the Commissioner to refer the decision to a Board of Review for review. If the request is accompanied by a fee of two dollars, the Commissioner is obliged, subject to his right to obtain further information from the taxpayer, to act in accordance with the request.

Amendment of an Assessment

22.14. Section 170 of the Act contains a general power for the amendment of assessments by the Commissioner. The limits imposed by the section have no application where the Act makes provision for the amendment of assessments in specific cases (see section 170A). Aside from the cases of fraud or evasion, or where there has not been a full and true disclosure of all the material facts necessary for the assessment, no amendment may be made either to increase or reduce the liability of the taxpayer except to correct an error in calculation or a mistake of fact. No such amendment may be made after the expiration of three years from the date when the tax became due and payable under the assessment, except where the taxpayer has applied for the amendment of his assessment within that period and has supplied to the Commissioner within that period all the information needed by the Commissioner for the purpose of deciding the application. Subsection (9) of section 170 provides that, where an assessment includes an estimated amount of income from an operation or series of operations extending over more than one or parts of more than one year and where owing to that fact the profit or loss was not ascertainable at the end of the relevant year of income, at any time within three years after ascertaining the total profit or loss actually derived the Commissioner may amend the assessment to ensure its completeness and accuracy.

22.15. It has been submitted that a taxpayer who makes application for amendment of his assessment in these cases should have the right to lodge an objection if the Commissioner fails to accede to his application. The Committee is of the opinion that, where the taxpayer requests amendment of an assessment under section 170 (9)and supplies all the information necessary for amendment within some specified time, he should have the same rights of objection and appeal as are available in respect of an assessment. The right of objection should be allowed against a refusal by the Commissioner to amend, which should be notified, or against the amendment so made, even if it reduces the tax payable. The Committee does not recommend that this right of objection and appeal should be extended to amendments of assessment under


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other sub-clauses of section 170. To do so would seriously impair administration of the Act and virtually give unlimited opportunity to dispute an assessment any time in the period of three years after its due date for payment.

Objections to an Assessment

22.16. The Committee has received a number of submissions bearing upon the question of objections to an assessment and the nature of these will be apparent from the discussion which follows and in which it may be useful to bear in mind the following statistics which give the number of objections lodged with the Commissioner in recent years:

   
1969-70  1970-71  1971-72  1972-73  1973-74 
37,169  36,623  48,381  58,793  54,401 

22.17. The time-limit for a taxpayer to lodge an objection to any income tax assessment with which he is dissatisfied—within sixty days after service of the notice of assessment—would seem to be reasonable in practically all cases. The Committee recommends that this time-limit should apply in relation to assessments issued under all taxation statutes. Submissions to the Committee, however, have raised the question that there should be some means by which further time may be granted for lodgement of an objection where unusual circumstances arise. It is of interest to note that in the income tax legislation of the United Kingdom, Canada and New Zealand there are provisions enabling the granting of a further period for lodgement of an objection beyond the initial statutory period.

22.18. Provision should be made in the Australian taxation statutes enabling the Commissioner to grant further time if he is satisfied that there was a reasonable excuse for not lodging the objection in time. Where the Commissioner is not prepared to grant a request for further time, the request should be referred to a Board of Review for decision. There should be similar powers to grant extended time in relation to the lodgment of requests for reference to a Board of Review and appeals to a Court, but in these latter cases the power to extend should be vested in the Board or the Court as the case may be.

22.19. Whilst the Commissioner is bound to serve the taxpayer with written notice of his decision upon the objection, no time-limit is imposed within which he must do so. There are practical difficulties in setting a time-limit upon the Commissioner's decision. It is by no means unusual for the grounds of the objection to make it necessary for him to call for further information from the taxpayer. Moreover, grounds of objection are frequently lengthy and complex and raise important questions of law. Next should be borne in mind the large volume of individual objections to be dealt with, and lastly it should be recalled that in the exercise of his office the Commissioner stands between the requirements of the Revenue and just treatment for the taxpayer and this position imposes upon him a double duty of care. In light of these considerations the Committee believes that it is better not to impose a time-limit upon the Commissioner. It is not to be supposed that, where real hardship can be shown by the taxpayer, his representations for a speedy decision upon his objection would not be heeded. In the last resort it seems that under section 75 (v) of the Constitution the taxpayer could obtain from the High Court an order to compel the Commissioner to give his decision upon an objection.




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22.20. The Act provides that upon a reference to a Board of Review or an appeal to the Court a taxpayer is limited to the grounds stated in his objection. It is not within the jurisdiction of a Board or Court to permit the taxpayer to add any new ground of objection even though the Commissioner may be willing to consent to that being done. There is no corresponding restriction placed upon the Commissioner as to the grounds upon which he can support an assessment except that where there are two sections of the Act, each giving power to make an assessment, an assessment made under one of those sections cannot be made effective under the other. The contents of an assessment with which the dissatisfied taxpayer is bound to object ‘fully and in detail’ may make it difficult for the taxpayer to understand the basis of his purported liability to tax and the Commissioner is not bound to supply him with an adjustment sheet. It is pointed out later that a taxpayer may not be able to gather from the document supplied to him under Regulation 35 (2) the basis of assessment or the reasons for the Commissioner's decision but, even if at that stage he could do so, it would then be too late to amend his grounds of objection.

22.21. This state of affairs is highly unsatisfactory and unfair to the taxpayer. Conceded that there should not be any unlimited right of amendment, it is eminently reasonable that a taxpayer should be able to contest his case upon any ground open to him when he is placed in a position for the first time to understand the contentions which he has to meet. The Committee refers to its later recommendation in paragraph 22.25 to the effect that the Board, in the exercise of its discretion, should have power to require the Commissioner to supply the taxpayer with further particulars of the computation of the assessment and of the reasons for the decision disallowing the objection and is of the opinion that the Board should in such a case fix reasonable time after the supply of those particulars for the taxpayer to amend his grounds of objection where the particulars revealed that the original grounds were not sufficiently widely expressed. The same situation should apply where in the first instance the taxpayer appealed to a Supreme Court against the Commissioner's decision upon his objection. The Commissioner should have a corresponding right to give his decision upon the amended grounds. It could be safely left to the discretion of the Board of Review or the Court to determine the procedure which in the particular circumstances would be just to both parties.

Powers and Procedures of a Board of Review

22.22. The powers of a Board of Review are not judicial and its functions are to review all decisions of the Commissioner as are referred to it. For this purpose the Board is in the same position as the Commissioner and, in making its own decision, can substitute its own opinion or determination for that of the Commissioner. A Board of Review is an administrative body and is not bound, as is a Court, by the rules of evidence and it has no power to award costs against an unsuccessful party. It is bound to give its decision in writing either confirming, reducing, increasing or varying the assessment and, at the request of either the Commissioner or the taxpayer, must state its findings of fact and the legal reasons for its decision.

22.23. Regulation 35 of the Income Tax Regulations requires the Commissioner when referring a decision to the Board of Review, to furnish both the Board and the taxpayer with, amongst other material, the Commissioner's reasons for disallowing the taxpayer's claim. It has been held that this regulation does not empower the Board to order the Commissioner to supply the taxpayer with particulars as to how the assessment is made up or the steps in the reasoning by which the ultimate conclusion of the Commissioner was reached.




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22.24. Nevertheless, whilst not a Court, a Board of Review is a quasi-judicial body and natural justice requires, especially as the taxpayer bears the onus of displacing the decision of the Commissioner, that the taxpayer should have a sufficient knowledge of the basis of that decision to enable him to go about his task with factual material and legal argument relevant to the question which the Board is called upon to decide. The taxpayer is bound to state ‘fully and in detail the grounds on which he relies’ in his objection and the Committee sees no good reason why he should not be fairly apprised of the basis of the assessment to which he has objected and the reasons for the disallowance of his objection. While normally this information is readily available from the Commissioner, if the position is reached where a taxpayer is challenging the decision of the Commissioner before a Board of Review and considers he has not received an adequate explanation, there should be some remedy for him.

22.25. If the taxpayer was genuinely unable to gather from the document supplied by the Commissioner pursuant to Regulation 35 (1) (c) and (2) sufficient information for that purpose, he would come before the Board under a considerable handicap in the presentation of his case and the hearing would be either unduly prolonged or adjourned and further expense would in consequence be incurred. Clarification of these matters in the course of the hearing before the Board would in many instances be unsatisfactory and not a viable substitute for an adjournment. The Act should be amended to give the Board power exercisable at its discretion to require the Commissioner to supply the appropriate particulars to the Board and the taxpayer in cases where it was of the opinion that it was reasonable for the taxpayer to be provided with further particulars of the computation of the assessment and of the reasoning by which the Commissioner's decision was reached. Any application by the taxpayer for the exercise of the Board's powers on his behalf should be made within a specified reasonable time after the receipt by the taxpayer of the documents referred to in Regulation 35 (2), and the Commissioner should be notified of the application and have the right to be represented thereat. The Board's power in this connection could be exercised by any one member. The availability of a procedure of this kind would increase public confidence in the review and avoid the possibility of lengthy delays and adjournments.

22.26. An identical procedure should be followed where the taxpayer appealed directly to a Supreme Court from the Commissioner's decision upon his objection.

22.27. Any procedure which speeds litigation and reduces costs is highly desirable. Although not bound by the strict rules of evidence, the Board of Review quite properly follows those rules where the importance of the proof of certain facts is apparent. But, whilst the purpose of a reference to a Board of Review has been described in the High Court as providing ‘a less formal method of investigating facts at a hearing, and opportunity of exercising discretion and the like by a more detached administrative process’, parties before the Board tend at times to regard a hearing before the Board as one in which the whole of the evidence to be adduced must be presented and proved as if in a formal trial. The result often is that a great deal of time is taken up with the proof of facts which are or ought to be common ground between the Commissioner and taxpayer and which could readily have been admitted in advance of the hearing, thus saving time and expense in the calling of witnesses and production of documents. If, after the receipt by the taxpayer of the document referred to in Regulation 35 (2) and its possible further particularisation (referred to above), the parties were to come together before a single member of the Board in a short, preliminary hearing akin to what is known as ‘pre-trial’ procedure, all or many of the facts could be admitted and reduced to writing and such facts as remained in dispute could


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be brought within such a small compass that much of the fact-finding work of the Board would be eliminated. A further consequence would in all probability be that the questions of law would be narrowed. The saving of time, work and expense would result in the rate of progression of the cases before Boards of Review being accelerated. In the Committee's view the Board should be invested with a power to invoke a procedure of this nature to be exercised at its discretion.

22.28. Section 181 of the Act provides in effect that a person who is or has been a member of a Board of Review shall not be under any liability for any non-feasance or misfeasance in connection with his duties. The words ‘non-feasance’ and ‘misfeasance’ have technical legal meanings. It has been stated on high authority that ‘there is no such distinct wrongful act known to the law as misfeasance’; and what constitutes a misfeasance or non-feasance is a matter of not infrequent disputation.note The Committee is of the opinion that the immunity to be afforded to members of the Board of Review in connection with their duties should be the same as that afforded by section 72 of the Insurance Act 1973 to members of the Insurance Tribunal, namely, the immunity of a Justice of the High Court. The Committee also considers that a barrister, solicitor or other person appearing before a Board of Review should have the same protection and immunity as a barrister in proceedings in the High Court (cf. section 85 (2) of the Insurance Act 1973).

22.29. Section 194 of the Act provides that two members of a Board of Review shall form a quorum, the decision of the majority shall prevail, but that the Chairman shall have a deliberative but not a casting vote. Provision is made in section 180 for the appointment by the Governor-General of a member as Chairman in cases where the Chairman cannot be present. The Committee recommends that where two members form a quorum in the absence of the Chairman, the member appointed as Chairman should have a casting as well as a deliberative vote in order to prevent the possibility of a deadlock.

22.30. Section 196 (2) of the Act empowers the Board of Review to refer a question of law arising before the Board to a Court. But this power may be exercised by the Board only at the request of the Commissioner or the taxpayer. Bearing in mind the experience of the Board, the Committee believes that the power to refer a question of law to a Court should be exercisable by the Board at its discretion. There will be cases in which the state of the law in relation to a question arising before the Board is, in the opinion of the Board, in such doubt that both time and expense will be saved by a judicial decision before embarking upon a lengthy hearing of factual and legal argument before the Board itself. In a case where the Board does so refer a question of law to a Court, the Commissioner should bear the costs on the same basis as is outlined later in paragraph 22.42.

22.31. Some of the powers of a Board of Review are contained in the Act but others appear in the Income Tax Regulations. It would be more convenient and satisfactory in all respects for taxpayers and their advisers if all such powers were collected together in one place, the Act being the appropriate place for them. It is intended to propose certain amendments to the regulations in question, but the Committee must be understood as recommending that the amended regulatons, if adopted, should be incorporated in the Act.




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22.32. Regulation 39 (2) in effect enables a Board of Review to require persons to furnish information to the Board, to attend and give evidence before the Board and to produce to the Board books, documents and papers in his custody in relation to cases where the Board is of the opinion that the exercise of these requirements is necessary for the determination of matters arising before the Board. Regulation 39 (2A) provides that a person shall not without just cause or excuse fail to comply with any such requirement. Regulation 39 (3) enables the reimbursement of such a person's expenses to be made in certain circumstances. The weakness of these powers appears to be that there is no sanction provided to ensure compliance with them, and it has been ascertained that in some instances the Board's requirement is ignored with impunity. Powers such as these are essential for a proper determination of matters referred to the Board in the interests of both the Commissioner and the taxpayer. A failure on the part of a person to comply with any such requirement of the Board without just cause or excuse should be an offence against the Act and punishable by a fine of such an amount as to act as a satisfactory deterrent against non-compliance.

22.33. Whilst a Board of Review, being an administrative tribunal, is not bound by the rules of evidence, Regulation 39 provides that it shall ‘take evidence’ and may require a person to attend and ‘give evidence’. However, there is no provision as to the mode by which such oral evidence is taken or given other than the requirement of an oath or affirmation and the general statement in Regulation 38 (1) that reviews by a Board shall be conducted as the Chairman from time to time directs. It should be enacted that a witness giving oral evidence before the Board may, subject to the Chairman's directions, be examined, cross-examined and re-examined in accordance with the established procedure in the Courts. It should be expressly provided that a Board of Review should not be bound by the formal rules of evidence. A witness appearing before a Board of Review should have the same protection and be subject to the same liabilities in any civil or criminal proceedings in the High Court (cf. section 84 (3) of the Insurance Act 1973).

22.34. With these recommendations in relation to Boards of Review, the Committee also recommends that the provisions of Division 1 of Part V—Constitution of Boards of Review—in the Income Tax Assessment Act and such other provisions of Part V as relate to the practice and procedure of the Boards be transferred to the Taxation Administration Act. At the present time the Boards deal with matters arising in relation to taxes other than income tax, including estate duty and sales tax, and it is more appropriate that the constitution of the Boards and their practice and procedure be provided for in the Taxation Administration Act. This latter Act, of course, covers among other things the appointment and tenure of the Commissioner of Taxation and Second Commissioners of Taxation and provides for the constitution and procedures of Valuation Boards.

Appellate Powers and Procedures

22.35. Either the Commissioner or the taxpayer may appeal to the Supreme Court of a State from any decision of a Board of Review which involves a question of law and the Board shall, at the request of the Commissioner or the taxpayer, refer a question of law arising before a Board to a Supreme Court. The appeal or reference shall be heard by a single Judge of that Court and from his decision either party may appeal to the High Court. A question of law may arise on the facts as found by the Board of Review which facts are not themselves challenged by the appellant or may arise in the finding of the facts themselves where, on the evidentiary material before


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the Board, that finding could not be properly made or where the Board has committed some other error of law in arriving at that finding. The jurisdiction of the Court to entertain an appeal does not depend upon the Court's view that the Board has made an error of law which has affected its decision. Once it appears that some question of law has been involved, the whole decision of the Board and not merely the question of law is open for review on the appeal. The Court will give due weight to the Board's finding of fact, but is not bound by them and will arrive at its own conclusions on the questions of fact which have to be decided. If necessary the Court will hear evidence additional to that which was given before the Board. The essential question for the Court is whether the decision of the Board was correct. If the taxpayer who was dissatisfied with the Commissioner's decision was to by-pass the Board of Review and have his objection treated as an appeal to a Supreme Court, that Court would have the duty both of finding the relevant facts and also of ruling as a matter of law on the questions to which those facts gave rise. Where the Board, in exercising the same functions as the Commissioner, has exercised a discretion, the Court will not invalidate what the Board has done in this connection unless some error of law can be seen to have affected its determination.

22.36. If a taxpayer exercises his option to ensure that his case goes in the first instance to a Board of Review, it is reasonable that he should be bound by a finding of fact by the Board which is arrived at without breach of legal principles. If, on appeal to a Court by the taxpayer, the question of fact was enabled to be re-opened at the request of the taxpayer, there would be no good reason to deny the same right to the Commissioner. If the taxpayer wishes to have the Court determine the facts, he has the right to choose that tribunal to try his case in the first instance. To have two determinations of the same factual issues where no error of law can be discerned in the first instance is only a multiplication of time and expense.

22.37. The Committee would not propose that a Court should have the same general power to exercise discretions as is given to Boards of Review. But there is one situation where it considers that a Court should have power.

22.38. At the present time a Court can examine the validity of the exercise of the Commissioner's discretion to see whether it has been infected by legal error as, for instance, whether it has been exercised on irrelevant or inadmissible grounds and, if so, the Court can set it aside. But under the existing legislation, if the discretion has been validly exercised in point of law, the correctness of its exercise is unexaminable. It cannot substitute its opinion in this regard for that of the Commissioner or that of a Board of Review, although the Court may have before it the identical relevant material as the Commissioner or the Board of Review and be in some cases in the same position to exercise the power. Courts are constantly called upon to exercise discretions of widely differing kinds under both statutory powers and inherent powers. At present, if the case in which the Court finds legal error in the exercise of the discretion is an appeal direct to the Court from the Commissioner, the case is remitted to the Commissioner for further consideration; if it is an appeal from a Board of Review, it is remitted to the Board for the same purpose. Here lie the seeds of further litigation which in some instances will lead to unnecessary expense. The Committee sees no reason why a Court, in a case where it finds legal error in the exercise of a discretion by the Commissioner or by a Board of Review, should not be in the same position as the Commissioner and a Board of Review in regard to the exercise of a discretionary power where it is satisfied that it has the whole of the facts and other relevant considerations before it. In such a case, where the discretion to be exercised is one capable


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of determination by an objective test or standard, the Court should be entitled to exercise the discretion if it sees fit to do so where the Commissioner and the taxpayer, or their representatives, consent.

22.39. What is said in the preceding paragraph covers a main area of present difference in jurisdiction between a Board of Review and a Court which a taxpayer would take into account in deciding whether to take his case to a Board or to a Court. However, the Committee has noted that, once a taxpayer has applied to the Commissioner for a reference to a Board or for an appeal to a Court, his choice of tribunal is unalterable. This position could be made more flexible without disadvantage to the Commissioner and with advantage to a taxpayer in some cases. Accordingly, the Committee recommends that provision be made to enable a taxpayer to change the tribunal which he has chosen at the time he lodges an application for review or appeal. Any such request for a change of tribunal would need to be lodged before the Commissioner has referred the case to a Board or forwarded the objection to a Court.

Costs of Objections, Reviews and Appeals

22.40. Submissions have been received by the Committee in relation to the recovery of the costs incurred by taxpayers in formulating their objections to assessments and in appealing against the Commissioner's decisions which disallow the objections. Annually a great many objections to assessments are lodged with the Commissioner (see paragraph 22.16 above). Many of these are without substance and are withdrawn by the objecting taxpayer, some after reference to a Board of Review; some are wholly and some partly disallowed by the Board, and some are wholly allowed by the Board. In some cases either the taxpayer or the Commissioner appeals to a Court in respect of a Board's decision. Frequently, even in those cases in which the taxpayer is successful, the form of the objection goes far beyond the requirements of challenging the particular decision to which objection is taken. In many cases the objection takes what is a standard or substantially standard form. In short, to arrive at some reasonable basis for the taxpayer's costs in formulating his objection presents formidable difficulties and in practice the expense of doing so would more often than not exceed what would be a reasonable sum for the objection itself. The Committee does not recommend that the costs of an objection, even if successful, should be met by the Commissioner.

22.41. Bound up with the question of the costs of the objection is the other question whether the taxpayer who is successful before a Board of Review should be reimbursed for his costs and expenses of the hearing before the Board. In considering the answer to that question, these matters should be kept in mind. Firstly, the reference to the Board is one made at the taxpayer's option. Secondly, the reference to the Board puts him at no risk of costs being awarded against him if he is unsuccessful. Thirdly, the taxpayer, confident of success, can always take his case directly to a Court where the winning of his case will result in his costs being paid. The Board of Review is an administrative body and, having regard to the matters referred to, the Committee does not think that costs should be awarded either against the Commissioner or against the taxpayer in respect of its proceedings. The fees and travelling expenses of persons who are required to attend and give evidence pursuant to Regulation 39 (2) of the Income Tax Regulations are entitled to be reimbursed on a scale fixed by regulations—where requested to attend at the behest of the taxpayer, by the taxpayer, and in any other case by the Commonwealth.

22.42. It has been suggested that the Commissioner should abide by the decision of the Board of Review or that, if he wishes to appeal, he should pay the costs of the taxpayer whatever the result of the appeal in the Courts. This raises a somewhat different


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problem. The Commissioner may decide to appeal because he considers that a point of law of general importance is involved or that there is a substantial amount of tax at stake. Appeals to a Court—and the case may go further on appeal from the Supreme Court to the High Court—are usually expensive. In 1967 the Commonwealth Treasurer issued a statement in the following terms:

‘Although it will still be necessary to consider each case on its merits, it has been decided that, when the Commissioner appeals against a decision of the Board of Review, the Commonwealth will, as a general rule, be prepared to bear its own costs and the reasonable costs of the taxpayer in connection with the appeal, irrespective of the outcome. The Treasurer said he would not be prepared to enter into any arrangement regarding costs in cases where the taxpayer was seeking some benefit which the legislature clearly had not intended to grant. Apart from these exceptional cases, however, taxpayers who seek rulings from a Board of Review will have a reasonable assurance that they will not thereby become exposed, against their will, to the cost of litigation in the courts.’

In the Committee's view the Courts should have a wide discretion with regard to the costs on appeals to them from a Board of Review by the Commissioner; but, unless there is some feature of the case which in the opinion of the Court warrants a different order, the costs of such an appeal from a Board of Review should be borne by the Commissioner in any event.

Interest upon Pre-paid Tax Liabilities

22.43. A number of submissions have been made to the Committee to the effect that in certain circumstances payments made on account of taxation liabilities should bear a rate of interest for the benefit of the taxpayer. Some of these relate to a payment of tax in accordance with a notice of assessment notwithstanding that the assessment is objected to, or notwithstanding that, where the objection has been disallowed by the Commissioner, his decision has been referred to a Board of Review or is the subject of an appeal to the Court. By virtue of section 201, the fact that the assessment is objected to and that the Commissioner's decision disallowing the objection has been referred to a Board of Review or is the subject of an appeal to the Court does not relieve the taxpayer from his liability to pay the tax, which may be recovered from him by Court process unless the Court in which such action is taken grants a stay of proceedings, a course which would rarely be taken by the Court. It is not unusual in practice for the Commissioner not to take any recovery action in these circumstances where the taxpayer pays to the Commissioner a proportion of the tax levied, usually 50 per cent. If the taxpayer is ultimately successful in having the assessment set aside in whole or in part, it is this sum, or so much thereof as is refundable to the taxpayer, that is claimed should be repaid with interest.

22.44. Where a taxpayer has paid to the Revenue an amount in full or partial discharge of his purported taxation liability and his objection is upheld by the Commissioner, a Board of Review or a Court, there is justice in the claim that interest should be paid on the amount refundable to the taxpayer. In this case the Crown has enforced from him payment of a sum which has been shown to be taken from him without any justification under the Act which was relied upon for the exaction. Where the Crown rightfully resumes property and delays payments therefor, interest is generally payable upon the debt and, where property is taken from the citizen without sanction, the case for the payment of interest appears to the Committee to be unanswerable. The rate of interest should be specified as a realistic one in keeping with current economic conditions.




  ― 392 ―

Taxation Prosecution Procedures and Penalties

22.45. The Committee has received submissions relating to penalties and prosecutions dealt with in Part VII of the Act. Section 243 provides (inter alia) in effect that any allegation of fact (averment) contained in the process initiating a taxation prosecution shall be prima facie evidence of the matter averred. The purpose of the section is to enable the prosecution to sheet home its case without calling evidence to prove the facts necessary to sustain the charge made against the defendant. The section has no application where the intent of a defendant has to be proved or where the proceedings are for an indictable offence or an offence directly punishable by imprisonment. Section 221G is, for example, one of a number of sections in Division 2 of Part VI of the Act relating to collection of income tax by instalments and requires an employer, other than a group employer, to keep a tax deduction sheet and imposes a series of obligations in regard thereto. The penalty for failure to comply with certain of these obligations is fine or imprisonment. In many instances defendants charged with breaches of section 221G and other sections in Division 2 do not appear to answer the charge but, as the prosecution cannot rely upon the averments, the time of the Court is taken up in proving all the ingredients to sustain the charge.

22.46. It has been put to the Committee that the penalty of imprisonment should be deleted from these sections to permit charges under these sections to be proved by means of the averments. In these cases the penalty of imprisonment is rarely imposed and the Committee would favour its deletion.

22.47. It has also been submitted that section 243 should be altogether repealed and that the onus of proof in prosecutions under the Act should follow the general law. The type of provision found in section 243 is by no means unique and can be found in other fiscal and criminal legislation. It does not alter the fact that the prosecutor is left with the onus, both initial and final, of establishing the ingredients of the offence beyond reasonable doubt. Where the criminal intent of a defendant is an ingredient of the offence charged, this must be proved in the ordinary way. The Committee sees no good reason why section 243 should be repealed. It also sees no good reason why service of summonses for offences against the Act should not be effected by registered post.

22.48. The Court should be empowered in its discretion to extend the time for payment of pecuniary penalties which have been imposed. By virtue of section 247 (2) the Court, when an offender is convicted and ordered to pay a penalty, may order that the offender be given a specified time for its payment or allow it to be paid by specified instalments. Failure to pay the penalty or an instalment within the time specified will result in the imprisonment of the offender and, in all probability, any chance of recovering the penalty or the balance of it unpaid will be lost. No account is taken of some unexpected difficulty or hardship occurring to an offender who may be prepared to meet his liability rather than suffer imprisonment. Power in the Court to grant an extension of time would be in the interests of the Revenue as well as the taxpayer.

22.49. A submission received with reference to section 226 raises the question of penalty in a different fashion. For the failure to furnish, where required by statute or by the Commissioner, a return or any relevant information or for the omission from a return of any assessable income or for the inclusion therein of an excessive deduction for expenditure, the taxpayer becomes liable to pay an amount of additional tax calculated as prescribed by the section. The Commissioner is empowered for reasons which he thinks sufficient to remit the additional tax or any part thereof. It has been


  ― 393 ―
urged upon the Committee that section 226, which admittedly imposes heavy penalties in the shape of additional tax for breaches of its provisions, should be amended to distinguish between an accidental and deliberate breach of the section and the penalty for its infringement should only be determined by a magistrate. Section 226 is fundamental to the basis of the collection of income tax and it is essential that there should be a powerful deterrent standing in the way of non-compliance with the provisions of the Act and that the Revenue should be protected against procrastination and carelessness.

22.50. That is not to say, however, that every breach of the section should be visited with the totality of the penalty which the section prescribes. Returns are not always easy to compile and mistakes may occur even when care has been used to avoid them. It is not to be supposed that the Commissioner would not give full recognition to the likelihood of excusable, accidental error and by his power of remission he is enabled to make due allowance for it. If the taxpayer, however, is dissatisfied with the decision of the Commissioner relating to the remission of additional tax imposed by section 226, he is entitled to take the matter before the Board of Review which, by virtue of section 193 (2), has a limited power of reviewing that decision. In the Committee's view, no amendment of sections 226 or 193 (2) is called for along the lines suggested.

22.51. Representations have also been received by the Committee in relation to section 226 (4) which precludes the imposition of additional tax under the section where a prosecution is instituted in respect of the same subject-matter. Where a prosecution for failure to furnish a return is instituted under section 223, the penalty is not less than four dollars or more than $200; and it has been put to the Committee that many persons who have failed to lodge a return for a substantial income deliberately court prosecution knowing that the maximum fine of $200 under section 223 will be less than the additional tax which would be imposed by the Commissioner for late lodgment of the return without prosecution action being instituted. It is understood that additional tax imposed by the Commissioner for late lodgement of a return is normally based on what is in effect an interest charge of 10 per cent per annum of the tax payable for the period the return is late. It has been submitted to the Committee that it is anomalous that a taxpayer by courting prosecution can limit the penalty to $200 in these types of cases.

22.52. While the Committee elsewhere in this Report recommends revision of all of the penalties specified in the Act, this is not necessarily the complete answer to the submissions. Several proposals might be considered. One would be to repeal subsection (4) of section 226 and thus enable both the additional tax and the Court-imposed penalty to be exacted in appropriate cases. Subsection (3) of section 226 dealing with the Commissioner's power to remit additional tax could be expanded to include a direction that, in considering remission, the Commissioner is to take into account any penalty imposed by a Court. Another proposal would be to provide in section 223, which deals with prosecutions for failure to furnish returns or information, for a penalty of stipulated minimum and maximum amounts and, in addition, to give the Court power to order the person to pay to the Commissioner a sum not exceeding the maximum additional tax which could be imposed by the Commissioner under section 226 (1) of the Act. This latter is the pattern of the present legislation in relation to prosecutions and additional tax in cases of false returns, wilfully understating income and fraudulent avoidance of tax in sections 227, 230 and 231 respectively. The additional tax for failure to furnish a return is at present the greater of two dollars and an amount equal to the tax assessable on the return. To overcome cases where a return


  ― 394 ―
has not been furnished at the date of a Court hearing, a Court could order the taxpayer to pay to the Commissioner a specified proportion of the tax eventually found to be assessable or, of course, the whole amount thereof.

22.53. The Committee recommends the second of the two proposals outlined in the preceding paragraph: that the penalty specified in section 223 for failure to furnish a return or information be of the same nature as the penalty in the sections dealing with prosecutions for false returns and understating income.

22.54. Section 246 provides that no minimum penalty imposed by the Act should be liable to any reduction under any power of mitigation which otherwise is possessed by the Court. It has been submitted that the Court should have such a power. The Committee is not of that opinion. The real question would be whether the minimum penalty set by the Act for some particular offence is too harsh and that is another matter altogether. The Committee thinks that there ought to be a general review of the penalties which the Act imposes.

Hardship Relief

22.55. It has been proposed to the Committee that a tribunal should be established to consider cases of hardship under the Act. By virtue of section 265 such a tribunal already exists in the form of a Board consisting of the Commissioner, the Secretary to the Treasury and the Comptroller-General of Customs or such substitutes as the Minister may appoint for any of them. The practice is that substitutes are appointed to constitute the Board of Relief. Where the amount of the liability does not exceed $200, the powers of the Board of Relief may be exercised by the Commissioner; where the relief claimed is less than $2,000 in an amount of tax, the Board of Relief may refer the application to a member of a Board of Review; and where the relief claimed is not less than $2,000 in an amount of tax, the Board of Relief is bound to refer the application to a member of a Board of Review. In lieu of referring the application to a member of a Board of Review, the Board of Relief may refer the application to the Chairman of a Valuation Board constituted under the Taxation Administration Act 1953 before whom the same procedure for examining the application for relief is to be followed. It will be convenient in what follows below to discuss the matter in terms of a reference to a member of a Board of Review. Provision is made in the section for the attendance of the applicant or his representative before the member of the Board of Review who may permit the applicant to be assisted by other persons. The section contemplates that a careful and recorded examination, upon oath if necessary, shall take place before the member of the Board of Review, who must submit a report to the Board of Relief, together with the record of the examination, drawing attention to any facts which have a particular bearing on the application for relief.

22.56. The section does not, however, provide, at any rate in terms, that the member of the Board of Review shall make any recommendation as to the form or amount of relief which in his opinion ought to be granted; nor does it ensure that the Board of Relief must act upon the report of the member of the Board of Review. It is clear from the construction which Courts have placed on sections similarly worded to section 265 that, although it is shown to the satisfaction of the Board of Relief from the report and the examination of the applicant before a member of a Board of Review that the hardship of the applicant which the section contemplates does in fact exist, the Board of Relief is not bound to grant any relief to the applicant, as its power to grant or to decline to grant relief is purely discretionary. The Board of Relief is not obliged to state its reasons, so that it would be virtually impossible for an unsuccessful applicant


  ― 395 ―
to discover the basis of the refusal of his application. Accordingly, it would not be possible for him even to ascertain whether the discretion for which no limits are imposed in the statute was nevertheless exercised on grounds which were irrelevant to the purposes for which it was granted. From the decision of the Board of Relief there is no appeal.

22.57. The number of cases of hardship annually dealt with and the total amount of relief granted fluctuate. In the five tax years from 1969–70 to 1973–74 the average annual number of income tax cases dealt with was 427 and the average annual total amount of relief granted was $423,263.

22.58. In the Committee's opinion the procedure for dealing with cases of hardship in section 265 should be altered. Where the amount of the liability in question does not exceed $500, the powers of the Board of Relief should be exercised by the Commissioner. Where the amount in question does not exceed $2,000, the Board of Relief should in its discretion refer the application to a single member of a Board of Review. Where the amount in question exceeds $2,000, the Board of Relief should on its discretion refer the application to a Board of Review and ought to be bound to do so if so requested by the applicant. The Board of Review is entrusted under the review provisions of the Act (see Division 2 of Part V) with functions of great importance and deals with questions involving tax liabilities which can be very considerable in amount. Judging alone by the number of cases referred to them, it is apparent that the Board of Review has the confidence of the majority of taxpayers in the disputes between themselves and the Revenue. It is obvious that Parliament reposes the same confidence in the work performed by it. The system of review as conducted by a Board of Review in a difficult field works very well. Where an application is referred by the Board of Relief either to a member of the Board of Review or to the Board of Review itself, section 265 should provide that the single member or the Board of Review, as the case may be, be required to make a recommendation which should be implemented by the Commissioner. The Committee wishes to make it abundantly clear that there is not the slightest suggestion that applications for relief have not been dealt with fairly and upon their merits by the Board of Relief under its present constitution; but it believes that the treatment of hardship applications in this way would remove from the minds of taxpayers any feelings of bias which otherwise might be present when, as is the present position, a release of a tax liability rests solely with the representatives of government departments.

22.59. The scope of the hardship covered by section 265 is that

  • ‘(a) a taxpayer has suffered such a loss or is in such circumstances; or
  • (b) owing to the death of a person, who, if he had lived, would have been liable to pay tax, the dependants of that person are in such circumstances,

that the exaction of the full amount of the tax will entail serious hardship.’

In the exercise of the discretion the whole or part of the tax liability may be released. The coverage of the hardship to be taken into consideration is very wide. The Committee does not favour the suggestion that guidelines be incorporated in the section for the exercise of the discretion: the circumstances in which hardship may be met with could vary in so many different ways that it would be a practical impossibility to enumerate them and a partial listing would only tend to place a restrictive construction on a discretion which ought to be capable of dealing with any genuine situation that may arise. But power should also be given to extend the time for payment for such of the tax as may not be released.




  ― 396 ―

22.60. A particular aspect of hardship relief raised in submissions to the Committee deals with Australian tax on income from overseas where remittance of that income cannot be obtained because of exchange control operating in the country of origin of the income. Some cases of dividends are particularly in point.

22.61. In some instances the provisions relating to relief from hardship are appropriate, but the vast majority of these cases can be satisfactorily dealt with by the Commissioner under his powers to grant extensions of time for payment and to waive completely, or collect additional tax for late payment, as is appropriate to the circumstances of each case.

Public Interest in Taxation Legislation

22.62. It has also been submitted to the Committee that foreshadowed amendments to the Act and regulations should be given public circulation so that they may be discussed by members of the interested professions, commercial organisations, trade unions and other persons. This could be done in the form of the publication of a draft Bill or a Green Paper, as is the common and successful practice in the United Kingdom. Where the proposed introduction of a new tax is decided upon by the Government, protection against advantage being taken of the intended enactment is achieved by making a public announcement, simultaneously with the publication of the draft Bill or Green Paper, that the tax, when the appropriate legislation is passed by Parliament, will take effect from a specified day. In that way the stigma of retrospectivity of taxation would be avoided. The Committee is of the opinion that these procedures should be followed and that informed discussion of any new fiscal laws will be of considerable assistance in the framing of the legislation. The experience of this Committee suggests that publicity of the kind referred to will not lead to only a mindless opposition to taxation proposals.

Independent Standing Committee

22.63. It has been submitted to the Committee that an independent standing committee should be constituted whose duties, in liaison with the Treasury and the Taxation Office, would be to keep under constant review the working of the Act, to examine and report upon any amendments to the Act either suggested by members of the public or conceived by one or other of the government departments or made advisable by reason of decisions given by the Courts. The standing committee would be in a position to give assistance in the preparation of draft Bills or Green Papers and to examine any proposals forthcoming as the result of the publicity given thereto. The Committee believes that the opening up of changes in taxation legislation to general public discussion will not only prove of great benefit in framing the statutes which impose the taxes but also educate all categories of the public in the reasons for their introduction. By means of education and open debate, upon their enactment the laws will meet with a more ready and general acceptance and understanding on the part of all those called upon to comply with them, in place of the hostility which is often displayed on those occasions. Abundant proof of this is recently to be seen in the United Kingdom. The knowledge of the existence of an independent standing committee, which would always be in a position to receive the views of persons and bodies outside the area of government and to discuss them with their authors, would tend strongly to instil confidence in the public and allay the criticism that those who pay the taxes are never heard.




  ― 397 ―

II. Procedures and Compliance

22.64. Submissions have been received dealing with the relationship between the Taxation Office and taxpayers and their advisers. The matters raised include the manner in which taxpayers are informed of adjustments made in assessing returns lodged, information disseminated by the Taxation Office for the benefit of taxpayers and their advisers, and the question of whether a formal assessment should be issued in respect of non-taxable returns specifying the amount of a loss available for recoupment in other income years.

Adjustment Sheets

22.65. Where the taxable income shown by an assessment varies from that shown by the taxpayer in his return, or there is some other matter affecting the assessment that needs to be explained to the taxpayer, the Taxation Office issues an explanatory advice known as an ‘adjustment sheet’. Some submissions have criticised these sheets on the grounds of insufficient detail and inadequate disclosure of reasons.

22.66. It is always open to taxpayers and their representatives to seek further clarification by correspondence or by personal attendance at the Taxation Office or at a regional office. Earlier in this chapter the Committee has suggested a procedure that would enable taxpayers, in cases under appeal, to obtain from the Commissioner further details of an assessment.

22.67. The Committee acknowledges that some of the criticism of the details shown on adjustment sheets may be justified. However, improvement cannot be achieved by a change in the law; it appears to be largely a matter of administration. The Committee recommends that the Commissioner and his officers arrange for a review of the present practices to provide greater detail of adjustments made in those cases where a spelling out of reasons is needed to explain the variation made.

Supply of Information

22.68. Return forms. With return forms the Taxation Office supplies instruction sheets and other information designed to assist taxpayers in completing their returns. This material has been expanded in recent years: in relation to a salary or wage return (Form S), the 1974 Guide to Form S and the pamphlet explaining age concessions are proving particularly helpful.

22.69. There is a continuing need to expand and improve material available to taxpayers and their advisers in relation to the preparation of returns, and to this end many of the practices adopted in the United States and Canada might usefully be followed. In particular, the Committee recommends extending the provision by the Taxation Office of standard forms for attachment to the return where appropriate. Standard forms could be made available giving details of disposals of property, net rental income, motor-car expenses, and travelling and entertainment expenses—this list is clearly not exhaustive.

22.70. Information bulletins. From time to time the Commissioner has issued pamphlets, bulletins and the like setting out guidelines on the interpretation of the taxation laws and practices being adopted. The series of Income Tax Orders issued in the comparatively early years of Federal income tax and the Public Information Bulletins published after the 1964 amending income tax legislation are cases in point.

22.71. The publication by the Commissioner of rulings, guidelines and information on these lines is desirable and creates a better understanding of taxation laws and


  ― 398 ―
practices. Further, the dissemination of this information leads to fuller co-operation by taxpayers and their advisers in complying with the provisions of the law. Published information of this nature also helps to dispel the frequently-voiced criticism, when the operation of the taxation laws has an effect believed to be disadvantageous to the taxpayer, that the Taxation Office is endeavouring to assume the role of ‘rule-maker’.

22.72. The Committee is aware of the activities of overseas taxation administrations in issuing general rulings and information and is particularly impressed by what is being done in the United States and Canada. In issuing rulings and guidelines, the Taxation Office needs to make it clear that the published information is not binding upon the Commissioner in any proceedings before a Court or other tribunal.

22.73. Advance rulings. When requested by a taxpayer, the Taxation Office now gives advance rulings on the application of specific provisions of the law to a proposed transaction where full details of the contemplated transaction are supplied. The ruling is normally given on the understanding that it is not legally binding on the Commissioner. There is considerable merit in placing advance rulings by the Commissioner on a formalised basis binding him to the decision given. Rulings of this nature would clearly be of benefit to the taxpayer concerned and it is therefore reasonable that the cost of providing the service should be met by him rather than by the general body of taxpayers. In Canada an advance rulings service has been inaugurated for which there is a charge of $Can20 per hour, with a minimum of $Can 150 for any one ruling. The Committee recommends that a charge be made for giving advance rulings, based on the cost incurred by the Commissioner, subject to a minimum charge of, say, $200.

Non-taxable ‘Assessments’

22.74. Each year the Taxation Office receives returns of income upon which no income tax is payable. In relation to these returns the legislation does not require the Commissioner to issue any binding notification of his computation of the taxable income or loss, as it does in respect of returns upon which tax is payable. It has been put to the Committee that any adjustment sheet or other advice issued by the Commissioner should in effect be treated as an ‘assessment’ under the legislation, particularly where losses available for carry-forward are involved. This would mean, among other things, that the provisions of the law relating to the amendment of assessments and to objections and appeals against assessments would apply in relation to non-taxable ‘assessments’.

22.75. The argument for treating advices of losses as assessments is mainly that it would enable the taxpayer promptly to challenge, by the procedure for objection and appeal under the law, any adjustment made by the Commissioner with which the taxpayer did not agree. The present position, of course, is that the taxpayer is in no way deprived of the right of objection and appeal against adjustments in determining losses that become effective as a deduction from subsequent income. In the year of effective set-off, the taxpayer can object and appeal against the quantum of loss so brought forward and thus challenge any adjustment by the Commissioner.

22.76. If advices of losses were to be regarded as assessments, consequences other than rights of objection and appeal would follow. The provisions of the law relating to amendment of assessments would apply so that taxpayers would be subject to the time restrictions on adjustments that now apply to taxable assessments. If a taxpayer did not object within sixty days of service of a notice, he could find that a required adjustment to a loss involving a question of interpretation of a law was not possible


  ― 399 ―
under the legislation or that the time to correct an error in calculation or mistake of fact had run out. Further, a taxpayer in reaching a decision whether to challenge, by objection and appeal, an adjustment in a non-taxable assessment would need to weigh up the time and cost involved against the possible tax effect in the future.

22.77. It would be difficult to confine any provisions granting assessment status only to cases involving losses. Instances where adjustments to claimed losses create a taxable income but no tax liability would have to be included; also those cases involving a taxable income but no tax payable, where the year concerned could be taken into account in determining an average income, would have claim to similar treatment. In the result, the Taxation Office might be faced with the task of issuing a great number of non-taxable assessments to taxpayers who did not require the information.

22.78. The Committee does not favour provisions requiring the Commissioner to issue a non-taxable assessment in every non-taxable case or provisions treating all advices issued by the Commissioner in relation to non-taxable returns as assessments. It recommends that a taxpayer be entitled to request the Commissioner to issue a formal non-taxable assessment which, on issue, would for all purposes be regarded as an assessment. At the same time opportunity might be taken to clarify the intended purpose of section 171 of the Act, which deals with the position where no notice of assessment has been served within the period of twelve months after lodgment of a return.

Taxpayer Compliance

22.79. Any system of direct taxation relies heavily on the general acceptance of the system by those required to pay the levy and on the rendering of true returns. Legislation imposing taxes normally provides for additional imposts for incorrect and untrue returns or statements and failure to supply returns or information on time; and there are Court processes for prosecution in these instances. Like the taxation authorities of many other countries, the Taxation Office maintains on its staff officers whose task is to audit and examine the returns of taxpayers to detect inaccuracies or deception. In the opinion of the Committee this audit activity is essential. There is merit in extending it to the greatest possible number of taxpayers and giving it maximum publicity.

22.80. Elsewhere in this Report the Committee has proposed the introduction of a capital gains tax, measures for dealing with income splitting and ways of tightening up on the taxation of gifts of property. These recommendations relate mainly to capital transactions which will require the disclosure to the Commissioner of relevant information. In order that the Commissioner can properly administer provisions to this effect and also to assist in the general administration of income tax, estate duty and gift duty laws, the present requirements to supply balance sheets or statements of assets and liabilities with income tax returns should be enlarged.

22.81. At the present time balance sheets or statements of assets and liabilities must be furnished with each income tax return of a company, a superannuation fund, a partnership in business and certain trust estates. The Committee recommends that these requirements be extended so that a balance sheet or statement of business assets and liabilities is also supplied with each income tax return of a taxpayer carrying on a business or profession; all trust estates and partnerships should be included too.

22.82. A standard form of balance sheet or statement of assets and liabilities should be issued by the Commissioner for completion and forwarding with returns other than company returns. The form should also provide for the supply of associated


  ― 400 ―
information required by the Commissioner, such as movements in capital accounts of taxpayers in business.

Registered Tax Agents

22.83. The income tax law provides for the registration as tax agents of all persons who charge fees for the preparation of income tax returns or for transacting income tax business on behalf of taxpayers. At 31 March 1974, there were 19,432 individuals, partnerships and companies registered as tax agents.

22.84. The Act and Regulations provide for a Tax Agents’ Board in each State and for the constitution and conduct of these Boards, the registration and cancellation of registration of tax agents, and the imposing of penalties for offences against the provisions. Apart from the cancellation of a tax agent's license where, for example, he does not wish to continue as an agent or where a partnership or company is dissolved or liquidated, there are provisions for cancellation where the Board is satisfied that an agent has prepared a false return, neglected the business of a principal, been guilty of misconduct as an agent or is not a fit and proper person to remain registered. There is a right of appeal to a Court against the decision of the Board.

22.85. Where the Board finds a tax agent guilty of misrepresentation, neglect, incapacity or unfitness, the only disciplinary action it may impose, apart from reprimand, is to cancel his registration—a somewhat drastic step. There are obviously cases where cancellation is too severe a penalty but something stronger than a reprimand is called for. Accordingly, the Committee recommends that provision be made for other disciplinary action such as the imposition of a fine and suspension of registration for a period.

22.86. In view of the growth in the number of registered tax agents, with consequential increase in the number of disciplinary cases coming before Tax Agents’ Boards, and the additional disciplinary measures recommended in the previous paragraph, it is necessary that the present constitution of the Boards be reconsidered. The Boards at present comprise a Chairman, who is the officer in charge of the Commonwealth Sub-Treasury in the State, the Commonwealth Chief Auditor for the State and a person appointed by the Governor-General—normally a senior practising accountant. When the constitution of the Boards is being reviewed, consideration should be given to attaching greater weight to their disciplinary functions and less weight to their registration procedures. Moreover, one member, preferably the Chairman, should be an experienced legal practitioner.

22.87. The certificate relating to sources of information that a tax agent is required to complete on each return he prepares for a client includes the following, as set out in the Regulation:

‘(b) Have you satisfied yourself, and, if so, how, that the books of account, or other sources of information upon which the return is based, are correct and disclose the whole of the taxpayer's income from all sources?’

This question is frequently answered by a statement by the tax agent that he has not satisfied himself as to the accuracy of the return.

22.88. This question should be reviewed by the Commissioner in consultation with members of the accountancy profession and organisations representing tax agents. The purpose of the review should be to develop a question or series of questions that


  ― 401 ―
would go further towards securing a statement from the tax agent recording the steps he has taken to ensure the accuracy of the return covered by his certificate.

III. Payment of Tax

22.89. At the present time the liability for payment of tax is discharged by means of three main systems: firstly, the tax instalment deduction system (pay-as-you-earn), which requires tax to be deducted by the employer from salary and wages; secondly, the system of provisional tax payments by individuals in respect of income that is not salary or wages, applying principally to business income and income from investments and property; and thirdly, the system of payment of tax by companies. The system applying to companies is in course of change from one basically of payment in a single lump sum in the financial year following the year of income to one of payment by four instalments spread over the later year.

22.90. There is also the system of withholding tax on interest and dividends flowing from Australia to non-residents.

Tax Instalment Deduction System

Excess Instalment Deductions

22.91. The present system of tax instalment deductions from salary or wages is well established. Deductions from salary or wages comprise over half the total collections of income tax. The system is accepted by both employees and employers and generally works satisfactorily. But there are several aspects of the system requiring examination.

22.92. The instalment deductions from salary or wages are based upon schedules in the Regulations to the Act. The main schedule provides for instalment deductions in relation to concessional allowances for dependants and for home loan interest to which a taxpayer may be entitled. An employee may formally notify his employer of any of these concessional allowances and the employer is then required to take account of this information in making instalment deductions. The main scale of instalment deductions has built into it some recognition of average concessional allowances for items other than dependants, such as superannuation contributions and medical expenses; but generally the aim is to ensure that total instalment deductions exceed the amount of final tax payable, so that for a very high percentage of salary or wage earnings without other income there are end-of-year refunds. In some cases taxpayers deliberately refrain from informing their employers of entitlements to dependant allowances and in this way voluntarily increase the amount of their refunds. Moreover, in recent years there have been indications that the application of the main schedule of instalment deductions is resulting in greater numbers of salary and wage earners with further tax payable at the end of the year: the taxpayers chiefly involved are those without dependants and with few other concessional allowances. In September 1972 an optional schedule was issued with the object of reducing the number of cases where a further tax payment has to be made after the end of the year.

22.93. It is apparent from submissions that some taxpayers favour instalment deductions being aligned more closely with their final tax liability. It has also been put to the Committee that the rapid growth of end-of-year refunds, mainly in the months of July, August and September, is leading to more pronounced seasonal movements in the economy's liquidity—movements involving costs for the whole community. The


  ― 402 ―
end-of-year refunds have grown from $507 million in 1970-71 to $772 million in 1973-74 and an estimated $930 million in 1974-75.

22.94. Under the present legislation an employee can reduce his tax instalment deductions to a figure closer to his final liability by special application to the Commissioner for a variation of the instalment deductions. In the Committee's view this procedure should be more readily available to employees and more widely applied. The present system of declaration forms supplied by employees to employers should be extended to include a number of concessional allowances in addition to those for dependants and for mortgage interest. Within the limits of a maximum yearly allowance, the extension ought at least to encompass employee superannuation and medical and hospital benefit fund contributions collected through employers, and deductible life insurance premiums where supported on the declaration form by details of policy number, name of payee, etc. as now required on return forms.

22.95. The reduction of tax instalment deductions in this fashion should be entirely optional in the manner of the present reduction for dependants: it would be solely up to the employee whether he wishes to take advantage of it. Where an employee claims reduction of instalment deductions other than for dependants, the employer would be obliged to apply an instalment scale that takes no account of concessional allowances. The implementation of a scheme of this kind will inevitably involve the Taxation Office in an expanded role in advising upon and policing the pay-as-you-earn system. But the work load on employers would not be significantly increased; and as is the case at present, employers would not be required to accept responsibility for the accuracy of the items claimed by employees.

Limited Effectiveness

22.96. The key to the effectiveness of the tax instalment deduction system is the definition of ‘salary or wages’ in the legislation. While the definition is drafted to include payments made ‘under a contract which is wholly or substantially for the labour of the person to whom the payments are made’, its interpretation has severely limited the application of tax instalment deductions. Generally the system cannot apply unless payments are made in circumstances where a relationship of employer and employee clearly exists, and difficulties arise where payments based on work performed are made to one of a group of workers operating in a loose partnership arrangement: payments of the latter type cannot be said to be substantially for the labour of the one person to whom the payment is made.

22.97. Where the relationship of employee and employer is absent, the Committee recommends that payments substantially for the labour of one person or a small group of persons be included in the system of tax deductions at source. Like salary and wages, the income would be brought to account as income in a return after the end of the income year and, on assessment, credit would be given for the tax deductions. In similar fashion the system of tax deductions at source could be extended to certain payments for goods where the payment is substantially for the labour of the seller: for example, payments to individuals for supplying animal skins or opals. The systems of tax instalment deductions employed in the United Kingdom and New Zealand contain provisions similar to what is being proposed here.

22.98. The tax deductions would have to be made at a flat rate. However, a taxpayer would need to be given an opportunity of applying to the Taxation Office for a reduced flat rate where the nature of his operations and expected net income warranted a lower rate. Similarly, where the extent and nature of a taxpayer's operations,


  ― 403 ―
the maintenance of adequate records and the lodgment of past returns give grounds for reasonable expectation of the lodgment of complete and accurate returns and the payment of tax, exemption from flat-rate deductions at source might be sought from the Commissioner.

22.99. The areas of activity to be covered by extended tax deductions at source might include the building and construction industry; primary production, including forest operations and fishing; the entertaiment industry, including professional sport; and free-lance writing. The experience of the Taxation Office in these and other fields of activity where difficulties have been experienced in collecting tax should be drawn upon in delineating the areas to be covered.

22.100. Secondary or casual employment is another area in which the system of tax instalment deductions fails to operate effectively. At present secondary or casual employment yielding $20 or less per week is not subject to instalment deductions; and a casual employee who lodges with his employer a declaration claiming reductions for dependants is freed from instalments in respect of considerably higher casual earnings. While, to an extent, earnings not subject to tax instalment deductions must be shown in Statements of Earnings supplied to employees, with a copy to the Taxation Office, the coverage is far from complete. There is thus substantial scope for tax avoidance in the case of earnings from secondary or casual employment, and the opportunity of using false names increases the scope yet further.

22.101. Where a relationship of employer and employee arises, the Committee recommends that, for tax instalment deduction purposes, a distinction be drawn between main regular employment on the one hand and all other employment— secondary or casual—on the other. The former should be subject to tax instalment deductions on the present basis, main regular employment being interpreted as employment expected to continue for more than one week and to involve working on at least four days for a minimum of 30 to 35 hours a week. Other employment ought to be subject to tax instalment deductions at a flat rate high enough to discourage working under a false name and giving strong encouragement to include the income, and the credit for tax instalment deductions, on a return of income. It would be necessary to determine an amount per week, less than the present $20, below which no tax deductions would have to be made. There would also need to be provision for an alternative to the basic flat-rate deductions: employee taxpayers taking secondary or casual employment should be able to apply to the Taxation Office for a certificate authorising, in relation to a particular employment, flat-rate instalment deductions at a lower rate or in some cases no deductions. The employee would have the option of accepting the basic flat-rate deduction with the prospect of a refund on assessment of his return of income after the end of the year or of applying to the Taxation Office for a reduced flat-rate deduction: in both instances the income and credit for instalment deductions would still have to be included in the return of income.

22.102. A third area in which the tax instalment deduction system lacks effectiveness is in relation to benefits in kind—‘fringe benefits’—given by an employer to an employee. In Chapter 9 the Committee has made recommendations on the tax treatment of non-cash benefits from employment. Briefly, the Committee recommends that the tax instalment deduction system be extended, where possible, to ensure adequate instalment deductions in respect of the assessable value of employment benefits that are to be brought to account as assessable income. The present legislation on tax instalment deductions covers meals, sustenance or the use of premises or


  ― 404 ―
quarters, in addition to salary or wages, but the statutory figures of value obviously need to be lifted.

22.103. The Committee recognises that these recommendations will, to some extent, involve employers and certain other users of labour in additional work. But if, as a result, the effectiveness of the tax system is increased, the price is worth paying.

Other Aspects

22.104. On several other aspects of the system of tax instalment deductions the Committee does not propose to make firm recommendations. One of these concerns the difficulties in establishing the true identity of employee taxpayers at the employment point. An employee, with or without the connivance of his employer, may work under a false name. The recommended system of flat-rate tax instalment deductions for secondary or casual employment is likely to reduce tax evasion in this area. But if each adult person were to be given an identifying number to be used in all employment documents and in tax instalment deduction documents and tax returns, scope for tax evasion would virtually disappear. The Committee is aware of objections to any general system of allotting numbers to members of the population for purposes of identification, though it should be pointed out that such a system is in operation in the United States.

22.105. In the Committee's view the advantages of a system of identity numbers far outweigh the disadvantages, a matter mentioned earlier in paragraph 13.14. The obvious advantage in reducing tax evasion, and thereby conveying benefits by way of potentially lower imposts upon honest taxpayers, is in itself a major factor in favour of such a system. At 30 June 1974 the total amount of unapplied credit on Group Certificates was some millions of dollars. This figure represents tax instalment deductions made by group employers and included on Group Certificates issued to employees which the Taxation Office has not been able to match with returns lodged. Clearly this figure must include a substantial sum in respect of employees working under false names where there is not a corresponding return lodged: the tax correctly payable would generally exceed the amount deducted at source.

22.106. The Committee is also aware of the likelihood, under the present system, of false claims for dependent children in dependant declaration forms furnished by employees to employers, whether the employee is working under his true name or not. By this means an employee can substantially reduce tax instalment deductions or eliminate them completely. The proposal of the Committee in Chapter 12 that concessional tax allowances for children be replaced by benefits given solely through the child endowment system will eliminate claims for children in dependant declaration forms. This is a further point in favour of handling child maintenance benefits through the expenditure side of the Budget.

22.107. Finally, the question has been raised in submissions of the Australian Government paying interest on end-of-year excess tax instalment deductions due for refund. The Taxation Office endeavours to issue these refunds to a maximum number of taxpayers as soon after the end of the income year as possible, and by the end of October well over 80 per cent of refunds of excess tax instalment deductions have normally been posted to taxpayers.

22.108. The Committee has made recommendations that would enable any taxpayer concerned at the size of his expected refund to have the amount reduced. To calculate interest entitlements in relation to end-of-year excess tax instalments would


  ― 405 ―
be extremely expensive and might result in delays in making refunds to employee taxpayers. The Committee therefore does not favour the payment of interest.

Provisional Tax System

22.109. It is by means of the provisional tax system that individual taxpayers with income from sources other than salary or wages have since 1944 been called upon to pay tax on a basis broadly similar to the pay-as-you-earn basis applicable to salary or wage earners. In a year of income in which income other than salary or wages is derived, a taxpayer pays, not earlier than 31 March in that year, an amount of provisional tax normally based on the taxable income from this source in the preceding year of income. The amount and due date for payment of provisional tax are notified with the assessment for the preceding year of income. Where prior to this due date for payment of the provisional tax, or an extended due date, a taxpayer confidently anticipates that his taxable income in the current year will be less than in the preceding year, he may by a process of self-assessment have the amount of provisional tax reduced. Penalties by way of additional tax are provided for undue underestimation of income. A taxpayer may also have the amount of provisional tax increased above the notified figure by the same self-assessment process.

22.110. Submissions to the Committee on this subject can be conveniently divided into two categories, the first advocating that the provisional tax system be abolished and the second claiming that provisional tax should be paid by instalment. At the basis of the latter claim is the view that payment by instalment is a more convenient means of satisfying a substantial liability and that payment of all provisional tax in the last quarter of the year is a major contributing factor to the pronounced seasonal movements in the liquidity of the whole economy.

22.111. In the Committee's opinion, the pay-as-you-earn character of provisional tax should not be abolished. Receipt by the Government of substantial amounts of revenue from this source in the year of derivation of the taxed income is well established and abandonment of pay-as-you-earn would severely affect revenue in the year of change. So long as pay-as-you-earn applies to salary and wage earners by instalment deduction as income is received, there seems little justification for other individual taxpayers paying tax on any substantially more advantageous basis.

22.112. In considering the payment of provisional tax by instalment, the Committee has had in mind two other relevant matters upon which submissions have been received. These are criticisms of the present requirements that apply to taxpayers carrying on business activity who find it more convenient and desirable, for a variety of reasons, to prepare accounts on a year ending on a date other than 30 June; and representations on the problems facing tax agents in meeting the program set by the Commissioner for lodgment of clients’ returns. On both these matters companies as well as provisional taxpayers are involved: the company aspects will be taken up later when the system of paying company tax is considered.

22.113. The two matters mentioned in the preceding paragraph need spelling out. Under section 18 of the Act, a person desiring to lodge returns on an accounting period ending other than on 30 June requires the approval of the Commissioner. The Commissioner takes the view that where such approval is granted the person should not receive a tax advantage, such as a deferment or delay in payment of tax, compared with a taxpayer lodging on the basis of 30 June. Special conditions are not normally attached to approval to lodge returns on an accounting period ending on say 30 September, being after 30 June, except that there must be no period of income not


  ― 406 ―
covered by returns. In such a case the person involved accepts some tax disadvantage compared with a 30 June basis because he pays tax on income derived in the last three months—July, August and September—at an earlier date.

22.114. On the other hand, where a taxpayer seeks leave to lodge returns on an accounting period ending on, say, 31 March, being before 30 June, the granting of leave without a conditional adjustment would result in the taxpayer gaining an advantage from the deferment or delayed payment of tax on income derived in the three months of April, May and June following the balance date of 31 March. The usual condition attached to the approval is agreement to pay, in conjunction with the tax due on the first period ending 31 March, a further amount equal to tax attributable to taxable income derived or estimated to be derived in the following three months of April, May and June. Subsequent returns cover a twelve-month period ending 31 March and the further amount is held by the Revenue until the person ceases to be a taxpayer or changes the balance date, when an appropriate tax adjustment is made. Few individuals, partnerships and trust estates lodge returns on an accounting period ending other than on 30 June, though quite a number of companies do. The requirement to pay the further amount has been the main subject of complaint by companies in submissions to the Committee, and the matter is taken up later. Not all companies and individuals now lodging returns on an accounting period ending before 30 June have actually paid the further amount referred to, or an amount that is realistic in the light of their current income. There are a variety of reasons for this: for example, the present accounting period may have been adopted many years ago when annual income was considerably lower than it now is.

22.115. The second matter relates to the lodgment of clients’ returns by tax agents after the general due date of 31 August in conformity with a pattern set by the Commissioner. Briefly, the pattern requires that each tax agent lodge a certain percentage of returns, differentiated by category, by various dates between 31 August and 31 March. For many years now this has been a source of contention between tax agents and the Commissioner, the contending issues being the continually growing work load falling on tax agents and the need of the Commissioner to have returns lodged in sufficient time for assessment and collection of tax within the financial year. Some relaxation in the lodgment program has been advocated in submissions.

22.116. For taxpayers deriving income other than salary or wages—provisional taxpayers is a convenient term for them—the Committee recommends that tax payments be made by instalments on a pay-as-you-earn basis involving an adaptation of the present provisional tax system. The adapted system would not apply to income other than salary or wages below a set figure where both salary or wages and other income are received by a taxpayer.

22.117. Several other countries have adopted a system of pay-as-you-earn taxation for provisional taxpayers involving payment by instalments. In the United States and Canada, provisional taxpayers pay self-calculated tax on estimated income in the year of derivation by quarterly instalments; in New Zealand and South Africa payment is by two instalments. It is usual for arrangements to differ somewhat in the case of farmers and certain other taxpayers. In some instances heavy reliance is placed on estimates of income and self-assessment of tax by the taxpayer progressively throughout the year, with penalties by way of ‘interest charges’ for undue underestimation of income or underpayment of instalments.

22.118. Australia's present provisional tax system has a number of unsatisfactory features. For one thing, it involves a degree of unfairness vis-á-vis the system of tax


  ― 407 ―
instalment deductions applying to non-provisional taxpayers. Under the instalment deduction system a salary or wage earner is forced to meet his tax liability progressively as he receives his remuneration over the year of income, whether it be paid weekly, fortnightly or monthly. In fact, under the present system a very high percentage of salary and wage earners without other income are required to pay more tax than they strictly should during the year of income and to wait for an end-of-year refund of the excess: the Committee has earlier made recommendations that will mitigate the extent of the excess payment.

22.119. On the other hand, in the income year in which he derives his income a provisional taxpayer pays an estimated amount of tax applicable to that income; but in no case is he called upon to make payment until at least nine months of that year have passed and, in the majority of cases, until nine months’ income has been derived. Published figures reveal that more than half the 1.4 million assessments issued to provisional taxpayers in 1973-74, based on 1972-73 income, were due for payment after the end of the first week in April 1974 and more than a third were due for payment in May-June 1974 and later. Thus for a substantial proportion of provisional taxpayers provisional tax relating to income derived in 1973-74 did not become payable until the second quarter of 1974. The time of issue and due date of provisional tax assessments are of course largely dictated by the date of lodgment of returns by taxpayers and by tax agents on behalf of clients in line with the program referred to in paragraph 22.115.

22.120. A further area in which a provisional taxpayer gains an advantage in tax payment over a salary or wage earner is in relation to the excess of actual assessed tax for a year of income over provisional tax. The pattern of payments in figures published by the Commissioner indicates that provisional taxpayers who in 1972-73 year paid provisional tax that fell short of the amount subsequently assessed on their returns for that year would have made up the short-fall in the second quarter of 1974 or later. The short-fall would have been paid nine to twelve months after the close of the income year to which it related and, where substantial amounts were involved, a significant breakdown in the pay-as-you-earn principle would have resulted.

22.121. The setting of a due date for payment of any short-fall and for payment of the next round of provisional tax will depend on when the taxpayer's return is lodged. Ideally, all returns of provisional taxpayers should be lodged in sufficient time to enable the issue of assessments with due dates for payment on 31 March. This is not feasible and some taxpayers obviously delay lodgment of returns in an endeavour to postpone payment day. In the 1973-74 year the Commissioner issued almost 308,000 final notices calling for returns and information and instituted legal proceedings in some 54,000 cases.

22.122. Other features of the provisional tax system are the almost complete dead-letter character of provisions requiring taxpayers who begin to derive income subject to provisional tax to take steps to pay in the first year, and the minimal use of the self-assessment procedures to increase provisional tax payments to realistic levels, particularly where major increases in income can reasonably have been anticipated. These two aspects have led to unwarranted criticism of the provisional tax system, including claims that the system calls, in some cases, for tax payments absorbing virtually all the taxable income of the year in which the assessment is received or all the taxable income of the previous year shown in the assessment. Not infrequently, of course, the tax payable is in reality the tax attributable to the income of two years.




  ― 408 ―

22.123. For a number of reasons, therefore, the Committee has come to the conclusion that a system of pay-as-you-earn should be applied to provisional taxpayers, involving tax instalments of, say, one-third on 30 November and two-thirds on 31 May in the year of derivation of income. Where the actual tax payable falls short of the provisional payments, the taxpayer would be required to make up the short-fall by 30 September following the end of the year of income. The base for the instalments would, in the first place, be the final estimated income for the immediately preceding year of income; and the Taxation Office would issue before 31 October of the financial year in which the instalments are payable a notice showing estimated income, the total estimated tax, the amounts of each instalment and the date on which it is due for payment. With each instalment payment the taxpayer would be required to adopt the base and estimated tax in the Commissioner's notice, or provide a fresh estimate of the income of the current year and adjust his payment as necessary. Lodgment of a return for the preceding year and receipt of an assessment on that return would require the taxpayer to review, and vary if necessary, his base income and instalment with his next payment. The one-third instalment on 30 November would be payable after the equivalent proportion of the income of the year had, in most instances, already been derived, and the 31 May instalment would be payable towards the end of the full year. The final opportunity for estimation, and any necessary further payment, three months after the close of the year, would permit actual income figures or a more accurate estimate of the likely outcome to be used in calculating any short-fall of tax due for payment on 30 September. An ‘interest charge’ at a commercial rate on underpayments as a result of underestimates of income of more than 20 per cent on 30 September would be necessary to encourage taxpayers to comply, including taxpayers commencing to be taxed under the provisions for whom special provisions will be necessary.

22.124. Special rules will also be necessary for taxpayers, mainly certain primary producers, who receive the bulk of their income in the second half of an income year. For such persons instalments of, say, one-third on 15 February and two-thirds on 31 May might be appropriate, with the same opportunity as other taxpayers for a final estimate and further payment after the end of the year. Taxpayers lodging on accounting periods other than 30 June would have instalment payment dates set at the same intervals following the first day of their accounting period as taxpayers lodging on the basis of 30 June are allowed from 1 July.

22.125. The Committee believes that many taxpayers will find the move to paying provisional tax by instalment convenient. At present provisional taxpayers are often called upon to pay very large amounts in one lump sum in April, May or June, though the majority of these adequately plan for the meeting of such payments. There are some, however, who fail to plan their financial affairs efficiently and consequently experience difficulties in meeting the once-a-year tax bill: for them the instalment payment plan will be of considerable assistance.

22.126. The recommended system of instalment payments by provisional taxpayers will have the effect of aligning the tax payments of these persons, numbering about a million, more closely with the tax payments of approximately 4.7 million nonprovisional taxpayers. It will reduce the undue delays that now occur in meeting payment of substantial short-falls of provisional tax. The spacing of provisional tax payments over the year will also reduce the present seasonal drain on the liquidity of the economy stemming from the concentration of payments in the last three months of a financial year. However, the system would need to be phased in over several years.




  ― 409 ―

22.127. The taxpayers affected—mainly business people and investors—should have little difficulty adapting to the recommended system, especially as the majority of them already employ tax agents. By divorcing the amount and date of payment of provisional tax from the lodgment and assessment of the return of the preceding year, the way will be paved for the Commissioner and tax agents to settle a program of return lodgments which will answer much of the present criticism in this area.

22.128. Further, the setting of patterns of payment of the instalments at a single set of intervals from the commencement of the current income year, whether the income year be July-June or some other, will facilitate leave being granted to lodge returns on an accounting period other than one ending on 30 June: there will not be the same need as now for the Commissioner to insist on the special payment to overcome any delay or deferment in payment of tax. However, it will be necessary to have provisions to overcome any advantage or disadvantage brought about by the application of progressive tax rates to the assessment of a return for less than one or more than a full year on the occasion of the change-over from a July-June income year. Where a change in the rate of tax occurs between one income year and the next, the Commissioner at present does not attempt to split the income of an accounting period ending other than on 30 June into income subject to the previous rate and income subject to the new rate. This practice should continue.

Company Tax System

22.129. Under the system of collecting company tax by quarterly payments now being phased in, most companies will in a current year pay tax assessed on the income of the preceding year by instalments on 15 August, 15 November and 15 February, with the balance to be made up on the due date shown in a notice of assessment of the income of the preceding year. Where instalments are paid, the due date for payment will not be before 30 April.

22.130. This system is expected to result in a substantial reduction in the seasonality of company tax payments and will bring company tax somewhat closer to the pay-as-you-earn basis already applying to non-provisional taxpayers and recommended for provisional taxpayers. Although this company system is not on a pay-as-you-earn basis, it has most of the advantages of the system being proposed for provisional taxpayers. However, in the case of a company with an approved tax year ending other than on 30 June, the Committee recommends that the due date for payment of the three instalments of the company tax be set in relation to the tax year and not to 30 June, though it recognises that this change will need to be phased in.

22.131. The considerations behind this recommendation are twofold. Firstly, the Committee believes that on grounds of equity companies should pay tax as nearly as possible at the same time as one another in relation to the period in which the income is derived. Secondly, the adoption of this recommendation would meet much of the present criticism of the conditions set by the Commissioner before he allows a company to adopt an accounting period, particularly one ending before 30 June. This criticism has been referred to in paragraph 22.114.

22.132. There is, in the Committee's view, no valid reason why a company with an approved accounting period ending on, say, 31 March should not be required to lodge a return and pay tax at the same time intervals in relation to 31 March as a company balancing on 30 June is required to do in relation to 30 June. If this were done, greater tax neutrality would be achieved: no special adjusting tax payments, as a condition of


  ― 410 ―
leave to lodge returns on an accounting period, would be necessary and no tax constraint would therefore apply where a company desires for sound commercial reasons to balance at a date other than 30 June. In paragraph 22.128 the view was expressed, in the context of provisional taxpayers, that there should be no change from the Commissioner's present practice where an alteration occurs in the rate of tax from one income year to the next. That view has equal application here.

22.133. Under the system of quarterly payments now being phased in, some quarterly instalments as proposed by the Committee would be payable in a different financial year from at present. For instance, a company balancing on 31 March will, under the quarterly instalment system, make a first quarterly payment on the following 15 August, whereas under the Committee's proposal the first quarterly payment would be due on 15 May. The implications for Revenue of changes in timing involving different financial years are unlikely to be particularly significant. Moreover, the greater flexibility in the availability of balance dates other than 30 June for companies would also result in a better spread of the work involved by tax agents in preparing and lodging these returns and by the Commissioner's staff in checking and assessing. Over a year it would lessen the peak work loads and be more efficient generally.

22.134. With the changes proposed for payment of provisional tax by individuals and the recently enacted measures calling for the payment of company income tax by instalments, the date of payment of tax on profits flowing through the intermediary of companies has been brought forward. However, there will continue to be a major difference in the time of payment of tax on profits earned through a company and profits earned by an individual or partnership. Profits flowing through a company will not bear tax until the year following the year of income: on the other hand, profits derived by an individual or by him through a partnership fall to be taxed, by the operation of the provisional tax procedures, mainly in the year in which they are earned.

22.135. A provisional taxpayer with 1973–74 taxable income from a business would, under the provisional tax system proposed by the Committee, have substantially paid his tax liability by instalments on 30 November 1973 and 31 May 1974 with a final payment on 30 September 1974. The September payment would have been sufficient to bring the total payments to within 80 per cent of final liability or be subject to an interest charge. If that business had been conducted as a private company in that year it may be said that the tax on the ‘owners’ salary would be paid in the 1973–74 year on a true pay-as-you-earn basis but the tax on the balance of income taxed to the company would be paid by quarterly payments commencing 15 August 1974 with the final payment after 30 April 1975. Tax on dividends paid out of the 1973–74 profits would, under the provisional tax system, be substantially paid in the 1974–75 year. The financial advantage to a person operating through a company being able to hold and use funds which will ultimately go in payment of tax, is evident.

22.136. However, the difference in timing of payment of tax by companies should not be considered in isolation: there is the closely related fact that company profits are currently being taxed in the hands of the company and, to the extent they are subsequently distributed, also in the hands of the shareholders as explained in Chapter 16. This has the effect, for taxpayers who are on marginal rates somewhat less than the maximum, that more tax is eventually paid than would be paid if the profits had


  ― 411 ―
been derived as a sole trader or in partnership. The recommendation of the Committee in Chapter 16 for an imputation system will mitigate this greater liability depending on the extent of imputation given.

22.137. In theory, a trading profit earned through a company should fall to be taxed no later than a similar profit derived from trading by a sole trader. While the Committee favours a pay-as-you-earn system of tax payments by companies, the Committee also appreciates the difficulties of changing from the present system to a complete pay-as-you-earn basis.

22.138. Companies are at present still involved in the phasing in of the earlier payment of tax which arises from the system of payment by instalments. Proposals relating to the date of payment of tax by companies which have adopted a substituted accounting period, made in paragraph 22.130, will, if adopted, result in bringing forward the date on which tax is paid for some of them. Moreover, as yet, no imputation credit is available to shareholders. The Committee does not propose the introduction at the present time of a system to bring companies on to a basis more uniform with that recommended earlier in this chapter for provisional taxpayers. It may, however, become appropriate at a later date to give consideration to such a proposal. The method of introduction should, in any event, involve phasing in over a period of, say, ten years. This was the method of introduction of a system of pay-as-you-earn payment of tax by companies recommended by the Spooner Committee in 1951.

Withholding Tax

22.139. In Chapter 17 the Committee has considered the taxing of income flowing overseas, including interest and dividends subject to withholding tax. Here, brief consideration is given to the question of paying withholding tax on small amounts of interest and dividends. It has been put to the Committee that the costs of collecting withholding tax on trifling amounts of interest are out of all proportion to the tax collected. A survey carried out by the member banks of the Australian Bankers’ Association in 1971 showed that withholding tax of one dollar or less on bank interest accounted for 2.6 per cent of total collections of interest withholding tax by the banks and 0.1 per cent of total Commonwealth receipts from interest withholding tax. Some countries require withholding tax to be deducted only when the annual interest exceeds $10.

22.140. Freeing of small amounts from withholding tax raises the possibility of tax avoidance by the splitting of investments and by the splitting of payment of dividends and interest. The advantage to be gained from splitting of investments—several investments in distinct companies or borrowers—may not be significant. But splitting of payment—several payments of dividends or interest in the course of a year by the same company or borrower—could involve significant tax advantage, unless it was provided that payments would be free of tax only when they did not exceed in aggregate an annual total amount. This total amount, in the Committee's view, would need to be set at a modest figure, say no more than $20.

22.141. The Committee sees no objection to freeing small amounts from withholding tax if a limit of this kind on total annual payments is imposed.

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