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II. Review of Possible Reform

10.14. With so many overseas models, old and new, to choose between, and so many compromises that could be devised, it is necessary to make a systematic review of the arguments before coming to conclusions.

10.15. Broadly there are three directions that reform could take: (i) Australia could stay with its present basis of compulsory individual taxation; (ii) it could go over to a compulsory family unit basis; or (iii) it could retain the individual basis but provide families with the option of taxation on a family unit basis if both spouses so elect.

10.16. The Committee is agreed that the second course, the adoption of a compulsory family unit basis, must be rejected on grounds of general social principle. The right to be taxed as an individual has always been accorded in Australia. At a time when women are playing an ever greater role in the economic and other affairs of society, the withdrawal of this right would certainly be regarded as a retrograde step. And objections would come not only from women: men too might take exception to a universal and compulsory commingling of their tax affairs with those of their wives. This would, in the Committee's view, make a change in this direction politically unacceptable irrespective of whether married women (or married men) paid more or less tax after the change than they do now: social attitudes to the separate status of the sexes, rather than purely economic considerations, are involved here.




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10.17. The choice therefore lies between leaving the existing basis of individual taxation unaltered (with or without measures to handle income splitting) and adding an option for married couples to be taxed on some newly devised family unit basis if they elect to do so. The choice, naturally, cannot be resolved until a number of issues about the new basis are settled, but the general argument for family unit taxation can be considered first.

10.18. The proponents of the family as the tax unit rest their case mainly on a proposition about the normal attitudes and practices of married couples in spending and enjoying the fruits of their incomes. It is argued that, however separate, legally and practically, the sources of their two incomes, in practice married couples largely share or pool their expenditure. Much is jointly consumed: one house, one lounge suite, one television set, one refrigerator and (to a diminishing extent) one car suffices. Whichever spouse made the purchase, both enjoy the benefits, and even the purely personal expenditure of each gives the other pleasure. On this view of the matter, it is the total income of the pair that determines their ability to pay rather than the way the total is formally divided between them: it is wrong that families should pay more tax the more unequally their total income is divided, at any rate to the extent shown in Table 10.A.

TABLE 10.A.: TAXES PAID BY EQUAL-INCOME FAMILIES: EXISTING SYSTEM (a)

                                 
Total family income   Husband   Wife   Total tax payable  
6,000  5,000  1,000  680 
6,000  4,000  2,000  500 
6,000  3,000  3,000  440 
6,000  2,000  4,000  500 
10,000  8,000  2,000  1,900 
10,000  7,000  3,000  1,600 
10,000  5,000  5,000  1,360 
10,000  3,000  7,000  1,600 
10,000  1,000  9,000  2,300 
20,000  19,000  1,000  7,830 
20,000  15,000  5,000  6,150 
20,000  10,000  10,000  5,560 
20,000  8,000  12,000  5,640 
20,000  4,000  16,000  6,440 
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10.19. It must be agreed that this argument has force. But even those who use it will certainly concede that a high degree of sharing of this kind is by no means universal. In some marriages, and not by any means only unhappy ones, almost completely separate patterns of spending and enjoyment may be the rule. Between the extremes a whole range of intermediate arrangements will be found. At the one extreme a family unit basis would give the fair result, at the other the existing individual basis would. The compulsory family unit would be unfair to some; the compulsory individual unit is unfair to others. A graded set of alternatives being self-evidently impracticable, to give a choice between two bases is at least better than to give none. The Committee agrees with this conclusion; the difficulties lie in settling the details.

Questions Arising over the Taxation of Family Units

10.20. The first question of detail under a family unit system is the rate scale to be used. Under the British system the same scale as for single persons is applied to the


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aggregate income of the married couple (though with qualifications in the form of allowances to moderate the extreme severity of the result). If this be called ‘pure aggregation’, then ‘pure averaging’ might be the term for the system introduced in the United States in 1948, when a schedule with tax brackets twice as wide as those for single persons was adopted for those electing family treatment. This, as noticed, gave the same arithmetical result as if each spouse was taxed separately on half their combined income.

10.21. In terms of economic equity between married and single persons, neither of these very simple solutions to a difficult issue commends itself. Pure aggregation produces the same result as the current Australian individual basis in the special case of one spouse having no income (apart from the effect of the modest dependent spouse allowances). But it would increase the tax paid by the pair in almost any case where both spouses have significant incomes. They would then pay more tax than if they had elected to be taxed as individuals, and the amount by which that tax would increase would be the greater the more equal were their separate incomes. An election system with this rate would ensure no elections. Pure averaging, by contrast, would mean that election saved tax for all married couples except those who happened to have equal incomes. The tax each paid would in no way reflect the additional capacity to pay inherent in the notion of shared enjoyment. Everyone would have a financial inducement to elect, including perhaps those whose relationship was more fairly described as, and felt to be, economically quite separate: the tax result would be the same as if all couples achieved complete income-splitting. The loss of revenue would be so great as to entail, if the income tax revenue were to be maintained, a severe increase in tax on single persons (and those married couples who resisted the tax inducement to represent themselves as a sharing unit). It was for this reason that the pure averaging provisions of the United States tax were abandoned in 1969.

10.22. It is inherent in the equity arguments for an elective family unit system that there should be a distinct family rate somewhere between the extremes of pure averaging and pure aggregation. The former is undoubtedly too kind to electing pairs, too unkind to single persons and couples who require individual treatment; the latter undoubtedly too harsh on electing pairs, too kind to single persons and those who accept individual treatment. The choice of family rate relative to the individual rate is therefore one of nice judgment.

10.23. A further question that has to be dealt with under a family system is the treatment of dependent wives. There are here two distinguishable situations: (i) when the wife's dependence is primarily due to her looking after small children rather than going to work; and (ii) when, without children, she simply prefers to take no paid work (or can obtain none). In the present Australian income tax system they are treated alike. As regards (i), married couples who both work often feel that, because their child-minding and their housework involve more strain than for families where the wife is at home, they are unfairly treated at present. Under a family unit system this situation could be handled by an earned income allowance for the second working spouse. As regards (ii), under the present system the family in which the wife stays at home may feel over-taxed relative to the family in which both spouses work and receive the same total income, since the dependent spouse allowance is small and the wife will almost certainly be contributing domestic services of value even though they are unmeasurable. But under a family unit system with a rate near the pure averaging end of the range, the situation might be reversed. Examining this problem, the Canadian Royal Commission on the Status of Women (1970) was tempted to propose the abolition of any allowance for dependent wives without dependent children,


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but concluded against this recommendation because it felt there were inadequate employment opportunities for married women of working age in many places and it was concerned also for the position of elderly wives. The future of the dependent spouse allowance in Australia is further discussed in Chapter 12.

10.24. The treatment of children in a family unit system also requires thought. It is implicit in the concept of a family unit that the income of children is part of that of the family as a whole. Certainly when living at home children have full use of the common equipment of the family and may properly be said to share in much parental expenditure. Considerable scope for tax avoidance would remain if any property income they derived, whether the property came to them by parental gift or otherwise, were left to be wholly taxed on an individual basis. This matter is dealt with in Chapter 11. Income being accumulated in a trust estate to which a child is contingently entitled must also be considered. Indeed there might be income so accumulating to which husband or wife is contingently entitled. These matters are taken up in Chapter 15.

10.25. Concessional deductions for dependent children, and the associated issue of child endowment, appear to be unaffected in principle by the possible adoption, or rejection, of a family unit system and their discussion can be left over to Chapter 12. This would not be so, however, if the French version of the system were selected. That variant, summarised in paragraph 10.11, provides, as there remarked, extremely generous treatment for parents with children and seems to be expressly designed to encourage a high birth rate. The Committee presumes that this is not an objective of Australian Government policy and would therefore not recommend a quotient system.

Individual Taxation with an Election System

10.26. The provision of the option to be taxed on a family unit basis would not reduce the necessity, which the Committee regards as urgent, to remedy tax avoidance by income-splitting within a family which has not exercised the option. It would be necessary, at the least, to deny the tax effects of tax-avoidance transfers of income by parents to children. Furthermore, spouses who were taxed as individuals and who had incomes of unequal magnitude would still have an incentive to make tax-avoidance transfers of income to enable more equal incomes to be returned for taxation purposes. By choosing to be taxed as individuals they would have asserted a claim to behave, in their financial dealings, as if they were at arm's length, and it would be important to ensure that this relationship was reflected in their tax liability. Measures directed against income-splitting are proposed in Chapter 11. Consideration must also be given to the accumulation in a trust estate of income to which a member of a family is contingently entitled. This matter is considered in Chapter 15.

Restrictions upon the Right of Election

10.27. During the decades over which a marriage will normally last, the absolute and relative incomes of husband and wife will usually change. There will be years in which to be taxed as a unit would be more advantageous financially, others when separate individual taxation would reduce their tax liability. To provide married couples with an unrestricted right to move in and out of family unit taxation whenever it would save them money to do so would be perilous to the Revenue and inequitable between married persons and single, whether they be bachelors, spinsters, widowers or widows. The proposal to institute an option for taxation as a family unit is not put forward as a mode of reducing taxes for married persons (or raising them for the


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single); it is, rather, designed to provide a fairer allocation of personal income tax between persons, and in particular between families with different practices and attitudes towards the expenditure of their separate incomes. Some restriction on the right to elect and to cancel past election therefore seems to be imperative.

10.28. Such a restriction would not be easy to define and administer. Provisions for cancelling an election would of course be necessary in the event of formal separation or divorce. In addition it might be provided that married persons who do not elect for family unit treatment within some defined period after the option becomes available or after their marriage may elect thereafter only upon the fulfilment of a condition that guards the revenue from any misuse of the option to elect. Thus the condition might require the payment of the additional tax that the spouses would have paid had they elected in the immediately preceding years.

De Facto Relationships

10.29. Where any provision of the present law depends on a marriage relationship, a formal marriage is necessary, although in some circumstances an illegitimate or adopted child may qualify as a dependant. The Committee is conscious of the change in social attitudes that could lessen the significance of formal marriage. An extension of the law so that the status of ‘spouse’ would include a partner in a de facto relationship would, in the Committee's view, be desirable if it were possible to define such a relationship in a manner that would not pose undue problems of interpretation and application. The Committee has, however, concluded that it is not possible to define the relationship in a satisfactory way. One context in which proof of the relationship will be important is the election of family unit treatment. The restrictions on the election could not be conveniently applied. Thus the requirement that an election must be made within a stipulated time after marriage would pose the problem of establishing the commencement of the relationship. The claim for a concession for a dependent spouse made in a previous return would assist; but no such claim would have been made where, because both had income, no tax advantage could have been obtained. Another context is the application of provisions against income-splitting. The Commissioner could not enforce the law in regard to a de facto relationship without what might be thought to be an unacceptable invasion of privacy.

Separated or Divorced Spouses

10.30. The present law (section 23 (1)) exempts income received by way of periodical payments in the nature of alimony or maintenance, by a woman from her husband or former husband. There is a proviso denying the exemption where the husband or former husband has, for the purpose of making such payments, divested himself of any income-producing assets, or diverted from himself income upon which he would otherwise be liable to tax. The husband is not allowed a deduction of the payments made to his wife or former wife.

10.31. In some countries the wife or former wife is taxed on the alimony or maintenance receipts and the husband is allowed a deduction of the payments. A system of this kind was proposed in Australia in 1942 but was rejected by the government of the day largely on the ground that a taxpayer who was separated or divorced from his wife would have been placed in a more advantageous position than a taxpayer who was not. The system, in effect, involves an income split, which would not be open to the latter.

10.32. The Committee would consider it appropriate to allow a husband a deduction for alimony or maintenance payments, whether or not divorced from his wife,


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provided there are safeguards against connivance to exploit the potential tax advantages and that the payments are taxed as the income of the wife or former wife. Already the law, in effect, allows a split of income between husband and wife where for the purpose of making payments to his wife the husband has divested himself of income-producing assets or diverted from himself income upon which he would otherwise be liable to tax. As explained in paragraph 11.45 section 102B (4) protects such a split of income from the operation of the short-term assignment provisions. The policy reflected in section 102B (4) should, in the view of the Committee, extend to allow a deduction of the payment where the husband is not in a position to divert income to his wife.

A Proposal for Public Examination

10.33. The provisions of a regime for family unit taxation as an optional alternative to the existing individual basis would be a large departure for Australia, requiring substantial public discussion. The Committee has not suggested a rate scale if only because in this report, given the separate necessity to consider the existing scale and the variety of other proposals being made, no precise figures would be helpful. In any case, statistics of family incomes, and their distribution between individual members, would be required to calculate the effect on revenue. But the Committee emphasises the importance of the choice of scale, and the need, when one is proposed, to explain its effects on families in different situations and its relation to the individual tax scale, in a readily comprehensible manner. The Committee is persuaded of the equity arguments for providing an option that recognises the reality of one large category of family relationship better than does the individual basis, and therefore recommends that the Government prepare a detailed scheme for an elective family unit system for public examination.

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