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45. Chapter 28 Conclusion

28.1. In keeping with the wide range of its terms of reference, the Committee has attempted to examine the structure of the Commonwealth taxation system in accordance with clause 1 of those terms always bearing in mind the requirements of clause 2. The aim of the Committee has not been to propose ad hoc amendments to the legislation which constitutes the taxation system. It has endeavoured to indicate the directions in which changes might best be made if the Australian Government is eventually to have a system of taxation which will be both a flexible structure so that, without the need for drastic changes, it may be readily adapted to changing conditions and needs in the future and also one which will be fairer, simpler and more efficient than the one that has grown by a multitude of particular amendments. The report should accordingly be regarded in its entirety.

28.2. The Committee also recognises that a number of the changes it would wish to see brought about in the future are of a fundamental nature. In order to avoid disruption both to the Revenue and to the affairs of the taxpayers, many of these will need to be phased into the system on a gradual basis accompanied by appropriate transitional measures.

28.3. Since the Committee commenced its work in 1972 there have been some important statutory alterations to the taxation legislation which have had to be taken into consideration by the Committee in the course of its examination. A list of these alterations to the law appears at the end of this report, before the index. The Committee has reviewed the legislation up to and including the amendments enacted by the Australian Parliament in December 1974.

28.4. During the course of the Committee's work the rate of inflation has grown very steeply and has reached a level which has had special effects upon the operation of the taxation system. For example, by consequential salary and wages rises, inflation has produced large increases in the intake of revenue and has translated taxpayers into brackets of taxation scales not hitherto contemplated by them or, it may be said, by the Revenue. This has not eased the task that has confronted the Committee. Some account of inflation's effects has been taken in Chapter 6, but it is not within the Committee's terms of reference to propose counter-measures for the cure of inflation itself. The Committee welcomes the recent announcement by the Australian Government of the setting up of an independent panel to make an inquiry into inflation and taxation.

28.5. It should be emphasised that it is not within the Committee's terms of reference to fix the rates or scales of taxation determining the amount of revenue to be derived from each form of tax. Where there are references in this report to figures exemplifying rates or scales of taxation, these are intended as illustrations of the working of the various matters discussed or of recommendations to which they are relevant. Clause 2 of the Committee's terms of reference refers to the need to ensure a flow of revenue sufficient to meet the Government's requirements; and what that need is from time to time is a matter for the Government of the day to determine. The Committee has envisaged in its recommendations a flexible structure which, by appropriate rate changes made from time to time, will enable current revenue requirements to be fulfilled by a fair distribution of the impact of the taxes.

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28.6. The short historical and descriptive accounts in Chapters 1 and 2 explain why, in the Committee's view, the broad approach made by the Committee to its functions as set forth in the terms of reference is necessary and timely.

28.7. Such an approach entails an argument that must go back to the basic facts of the place of taxation in the lives of individual members of the community and to the first principles of tax policy as they apply in a prosperous democratic society with a large and growing public sector. Chapters 3 to 5 contain what the Committee has been able to offer about these fundamental matters.

28.8. The conclusions and much of the analysis in these chapters are less clear-cut than could have been wished. Firstly, there has been the obstacle of insufficient statistics. The excellent quality of Australian official statistics is generally recognised, but there are great gaps in the information available about many matters central to precise discussion of taxation policy, for example about the distributions of income and wealth and their trends, and about the apparent incidence upon individuals of many kinds of tax. The Committee regards the household expenditure survey now being undertaken by the Bureau of Statistics as a very useful step in closing one of the gaps in necessary statistical information. Secondly, in a thorough review of the economic consequences of large-scale taxation, intricate and controversial issues of economic analysis and general economic policy cannot be evaded; and so long as they are unsettled among the specialists, the Committee has been able to make only provisional judgments about them. Thirdly, the Committee has recognised, more willingly, that in the final evaluation of alternatives, appeal must be made to moral, social and political judgments about which well-meaning and serious men and women will always differ.

28.9. Nevertheless the Committee has reached one recommendation that it believes should be acceptable to a broad spectrum of public opinion and is consistent with a wide range of attitudes to social policy. It believes that the weight of taxation should be shifted towards the taxation of goods and services and away from the taxation of income. The Committee judges that, in combination with the reforms it proposes in the taxation of capital and capital gains, a strategy of change in this direction would in time go far towards achieving the principal aims set for it in its terms of reference.

28.10. The separate discussions of existing and potential taxes which are contained in this report have been written with this strategy in mind. Some, though by no means all, of the proposals made depend on it. The reader should be again reminded that the discussion relates to a revision of the entire tax structure for the future and that it would be consistent with the acceptance of the proposals that immediate necessities may justify quite another action in the short term.

28.11. Consistently with its broad objectives, the Committee has not concerned itself with the detailed drafting of legislation to embody its proposals. It would recommend that these be incorporated in entirely newly-drawn statutes rather than made the subject of further amendments to existing legislation already overburdened with the numerous changes that have been effected over a very lengthy period.

28.12. This report contains a comprehensive chapter index and a detailed general index. Hence in this concluding chapter it will be necessary to make brief references only to some of the more important subjects with which the report deals. To attempt to summarise the Committee's recommendations out of their context by way of a conclusion might lead to an inadequate understanding of their true effect. Further, it should be borne in mind that, with reference to some of the recommendations in the

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chapters themselves, certain reservations have been made by one or more members of the Committee. These reservations appear at the end of the chapters in question.

28.13. In Chapter 7 the Committee has considered some general issues in regard to the base of the income tax and made recommendations on certain specific issues.

28.14. A number of questions relating to the determination of the net income of a business or profession are examined in Chapter 8. In seeking to give effect to a principle that net income should as far as possible accord with the true profits of a business or profession, the Committee makes proposals, amongst others, for the allowance of deductions for long-service leave and for depreciation of buildings.

28.15. Chapter 9, in dealing with employment income, proposes that the law in regard to the taxation of fringe benefits be strengthened and that a standard deduction be allowed in respect of some employment expenses. In order to provide some relief from the tax on ‘illusory’ gains when interest income is taxed, a suggestion is made for a limited concessional treatment of interest income.

28.16. In discussing personal income tax in Chapters 10 to 14 the Committee makes a number of proposals. It rejects the compulsory aggregation of the incomes of husbands and wives but suggests that the possibility of introducing an optional family unit basis of taxation should be opened up for detailed public discussion. It is proposed that, in general, the unearned income of a minor child should be taxed at a rate which has regard to the parents’ incomes. Measures are proposed to cope with avoidance of tax by income-splitting. A recommendation is made that the rate scale should be simplified by replacing the present multiplicity of steps by fewer wider ones, and be reduced especially in the lower ranges, as the taxation of goods and services is increased. The Committee notes with approval the recent reduction in the number of steps in the scale as a move in the direction it has proposed. The future of existing arrangements for dependent spouses and children is examined, and it is suggested that the possibility of simplifying and phasing out many of the concessional deductions by parallel adjustments on the expenditure side of the public finances and in the rate scale should be explored. A study is proposed of the desirability of making social service benefits taxable, in some cases at a special rate in substitution for existing means tests. While thoroughly convinced of the unwelcome impact of inflation upon the personal income tax and the need to adjust for it, the Committee is unconvinced of the case for automatic statutory indexation.

28.17. A number of proposals are made in Chapter 15 as to the taxation of the income of trusts and partnerships. It is proposed that the accumulating income of a trust should, in general, be taxed at the maximum marginal rate of individual tax.

28.18. The Committee believes the present system of company income tax to be inequitable in its final impact upon shareholders at different income levels. After exploring the principal alternatives, it suggests the introduction of a partial imputation system (Chapter 16).

28.19. In Chapter 17, international aspects of income tax are considered. It is proposed that, in general, a system of including foreign-source income in the income subject to tax of a resident and allowing credit for foreign tax should replace the present system of exempting foreign-source income that has been taxed abroad. A number of proposals are made in regard to the taxation of Australian-source income of non-residents. Suggestions are put forward directed to strengthening the rules by which income may have an Australian source.

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28.20. The present provisions relating to income from primary production are examined in Chapter 18 and a number of proposals made, including an amendment to the law intended to preclude the deduction of losses arising from ‘hobby farming’.

28.21. In Chapter 19 the income taxation of the mining and quarrying industries is considered and observations are made on recent amendments to the law relating to mining taxation.

28.22. Aspects of the income taxation of general insurance companies are dealt with in Chapter 20. The exemptions from income tax given to a number of organisations are also reviewed, and consideration is given to the income taxation of co-operative companies and friendly society dispensaries.

28.23. Income taxation affecting superannuation and life insurance is the subject of Chapter 21. Proposals in regard to the law as it affects superannuation and retirement benefits are set out in the form of two views as to the reform of the law.

28.24. Chapter 22 deals with problems that arise in relation to the administration of the Income Tax Assessment Act and includes such topics as the Commissioner's discretionary powers, powers of and procedures before Boards of Review and appellate Courts, objections to and amendment of assessments, hardship, general procedures and taxpayer compliance and payment of tax, and a suggestion for the appointment of an independent Standing Committee to examine and report upon proposed amendments to the Act.

28.25. The taxation of capital gains is proposed, by the method of part-inclusion of gains in income with arrangements for spreading. Closer attention to what would constitute income and what would be a capital gain, and a study of the special taxation of development gains, are recommended (Chapter 23).

28.26. The present taxation of gifts and deceased estates, which is the subject of legislation at both Federal and State levels, is discussed in Chapter 24. By virtue of its duplication and differences between the States, the present situation is thoroughly unsatisfactory. The integration of the Federal gift and estate duty legislation is proposed as well as the replacement of the various separate statutes by a single national Act.

28.27. The treatment of charities for purposes of income tax and gift and estate duties is covered in Chapter 25.

28.28. Proposals for a separate wealth tax are considered but rejected in Chapter 26.

28.29. Chapter 27 deals with the taxation of goods and services and proposes a broad-based value-added tax and the abolition of the wholesale sales tax.

28.30. In the chapters dealing with specific taxes the Committee has of necessity devoted considerable space to anomalies and weaknesses in the present legislation and has made recommendations in many instances for their correction. This has tended to lessen the emphasis on its principal objective of formulating a long-term plan for a major restructuring of the revenue-raising measures of the Australian Government.

28.31. At the same time, it will have been made even more evident that income tax, estate and gift duty and capital gains tax need to be extremely complex to be effective and are costly in their operation both from the taxpayer's and the Revenue's point of view. This must reinforce the case, in terms of achieving simplicity and reductions in compliance and collection costs, for relieving as many taxpayers as possible from these taxes by lifting exemption levels below which they will cease to apply.