A list of attendees is at Attachment A. The meeting agenda is at Attachment B.
Introductory remarks
Rob Heferen welcomed attendees and said the purpose of these meetings is to achieve better dialogue between Revenue Group and relevant stakeholders. He mentioned the upcoming review of revenue forecasting and identified retrospective changes to legislation and tax policy consultation as important items for discussion at the meeting.
Fiscal outlook and associated tax measures
Rob Heferen gave an outline of the fiscal outlook, showing the following slides provided as handouts:
- Underlying cash balance.
- Tax receipts as a percentage of GDP.
- Change in GDP and tax receipts estimates.
- Revenue write-ups and write-downs from 2003-04.
- Revisions to total receipts since the 2011-12 MYEFO.
Rob Heferen mentioned that capital gains tax and company tax receipts are having a major impact on revenue collections. Tax receipts do not reflect economic performance; the economy is strong but tax receipts are weak. He reiterated the intention of the revenue forecasting review to minimise the need for large revisions.
Tony Greco noted he and other stakeholders invested a lot of energy in measures in last year's Budget that have ultimately not been taken up. He is concerned that the same may happen with the measures in this year's Budget, such as loss carry-back. Chris Barron mentioned that loss carry-back starts next year whereas some of the previous measures were budgeted to start years ahead.
Peter Strong wanted to know if there is going to be a definition of 'small business' that will include individuals instead of just companies and noted that while loss carry-back was limited to companies, there are other businesses who could benefit from a similar initiative. Rob Heferen noted that it would be difficult given loss carry-back is limited to a company's franking account balance.
Mark Goldsmith noted it seemed clear that business preferred a tax cut to loss carry-back. How are these decisions made? Rob Heferen talked about the expenditure review committee (ERC) deciding on what to prioritise with the Government looking at their overarching view and Treasury supplying information as requested (such as costing information, impacts and participation rates).
Revenue estimation methodology
John Clark spoke about the revenue forecasting process, with the following slides provided as handouts:
- Treasury revenue forecasting process: showing the areas of Government involved in forecasting.
- Forecast models: discussing the main features of tax forecasting.
- Forecast process: discussing the coordination process within Treasury and between Departments.
Frank Drenth: How accurate are the forward estimates? Rob Heferen talked about the distinction between the forecast and projections years in the forward estimates. The forecast years refer to what is expected to happen in the next two years. The projection years extend the changes that are expected to happen in the forecast years out for another two years. They are essentially linear projections of trends in the forecast years.
Andrew Mills: What kind of data sources do you use in forecasts? Roger Brake responded that Tax Analysis Division tends to focus on ABS data, tax return data, international sources, private data from IBIS World, data from ATO discussions at their various liaison groups such as the NTLG, behavioural impacts and a fair bit of judgement. They tend to build a specific model for every measure.
Yasser El-Ansary asked why the Treasury sometimes says a costing is 'unquantifiable'. Roger Brake said if little data and if uncertainty around costing is high, then it is necessary to draw a line and say 'unquantifiable'. Jennie Granger said that if a new measure is not similar to previous changes then it is harder to forecast. She also noted that sometimes the ATO gets in touch with taxpayers to obtain better data. Yasser noted that some currently 'unquantifiable' measures would in fact be quite large.
Tony Greco queried how the estimate of '1 million people no longer needing to lodge a tax return' was put together. Rob Heferen noted that the estimate was of the number of people who 'need not' (deliberate wording) lodge a tax return, although some of these people may still lodge a tax return in order to claim deductions or offsets or get refunds through the personal income tax system.
Andrew Mills: From a governance perspective, what secondary checks are done on tax proposals? Rob Heferen explained that unlike the 'green brief' process for expenditure (which the Department of Finance and Deregulation has carriage of, but Treasury and PM&C also feed into), Treasury alone has responsibility for the 'pink brief' process for revenue proposals. This is a legacy of an historical preference on the part of Treasurers for a single port of call for tax policy.
Grant Wardell-Johnson: Why do Treasury models sometimes show primary impacts and sometimes show secondary and behavioural impacts? Roger Brake said costings are generally driven by primary considerations, but secondary and behavioural impacts are relied upon in some circumstances.
Not-for-profit (NFP) reform agenda
Brenda Berkeley outlined the current state of play regarding the NFP reforms based upon some slides provided as handouts:
- NFP reform agenda:
- a national 'one-stop shop' regulator – Australian Charities and Not-for-profits Commission (ACNC);
- better targeting NFP tax concessions;
- red tape reduction and streamlined reporting;
- statutory definition of 'charity';
- nationally consistent approaches to fundraising legislation; and
- restating and standardising 'in Australia' special conditions.
- State of play (1): State of play on ACNC and better targeting of NFP tax concessions.
- State of play (2): State of play on remaining agenda items and the NFP sector tax concessions working group.
Tessa Boyd-Caine: ACOSS supports the NFP agenda, but it would be best to ensure that legislative processes do not add to the compliance burden. Further, our concern is that the most important policy implications of reform of the treatment of housing for lower income households are not well-understood by the Government. Brenda Berkeley responded that the compliance burden on the NFP sector had been taken into account in staggering the delivery of the reform agenda. More consultation on that agenda will be undertaken.
Lin Hatfield-Dodds argued that the ACNC should not be seen as another arm of government, creating a situation where the NFP sector relies on government for funding. Lin observed that there are inconsistencies across different government Departments – could the Treasury help provide a whole-of-government approach? Suggested raising funds for business-like charities should not be subject to tax. Brenda Berkeley noted the issue of the appropriate targeting of not-for-profit tax concessions was under consideration.
Tony Greco: Definition of 'charity' is a small issue, instead there are so many things that impact the pro-bono work sector — is there a logic for the various demarcations regarding the deductible gift recipients? Brenda Berkeley noted any changes would require extensive consultation.
Tax issues
Retrospective changes to legislation
Gerry Antioch assured the meeting that retrospective changes to legislation are not taken lightly. They generally are only adopted under the following circumstances: cases of tax avoidance or where there is a significant risk to revenue; unexpected judicial rulings or interpretations; and cases where the Government wants to encourage or discourage a particular behaviour.
Yasser El-Ansary: The facts are simple, retrospective changes are undesirable. They make it difficult for tax advisors to provide guidance to their clients. Treasury and the Government should state the reasons for retrospective changes, even if that means admitting that a change is to boost revenue. Rob Heferen pointed out that it is Treasury's aim to be straightforward and clear.
Andrew Mills: If the courts side with a taxpayer, why should legislation on the issue be retrospective? An example of this is transfer pricing. Rob Heferen suggested that ensuring revenue was the main motivator.
Robert Jeremenko: Acknowledged Minister Shorten has been open about consolidation changes and the revenue aspect. Yesterday, Tony Regan was open at the Senate hearing about $7 billion impact, but it would have been good if he had said why the changes were proposed and why it needed to be retrospective.
Frank Drenth: Concerned Treasury is making decisions based on incorrect information as to the risk to revenue, for example SNF transfer pricing case.
Anne-Maree Wolff asked how robust the Treasury processes are in relation to issues brought to Treasury by the ATO. Rob Heferen clarified that the Budget and revenue laws were the direct responsibility of the Treasury and that the ATO administers the law. Chris Barron noted that the Treasury always focussed on the policy intent. Tony McDonald agreed that the ATO could provide valuable insight about risks to revenue, but that if retrospective law changes are necessary then something has gone wrong and difficult choices have to be made.
Tax policy and legislation consultation process
Rob Heferen impressed on the meeting that it needed to avoid the trap of thinking that consultation is a negotiation process. Treasury is not in a position to negotiate on policy once decisions have been made at the ministerial level.
Robert Jeremenko acknowledged that Treasury has at times conducted robust consultations, for example regarding the Part IVA project. He noted that the BTWG had presented a good example of how Treasury can consult before Government decisions are made. However a criticism was that costing around proposals and offsetting measures were not disclosed during the consultation period. This limited the feedback that stakeholders could provide.
Revenue Group projects and the legislative program
Business Tax Working Group update
Chris Barron noted that in regard to the BTWG process:
- A consultation guide will be released shortly. [This has since been released in June 2012 on the Treasury website].
- In July 2012, a discussion paper will be released that deals with reform proposals and savings options. The BTWG aims to consult over a six to eight week period. [This has since been released in August 2012 on the Treasury Website].
- In October, a draft final report will be released which will provide draft recommendations. Four weeks will be allowed for consultation on the draft report.
- In December a final report will be presented to the Government.
- There will be consultation on all aspects of the recommendations put forward and stakeholders will be given two opportunities to comment.
Robert Jeremenko noted that the Forward Work Program is a great resource for transparency, particularly the indicative timeframes. But consultation really needs to be at least six weeks, when often it is shorter (for example the Multiflex amendments).
Brenda Berkeley noted that consultation had taken place on two earlier versions of the ultimate Multiflex amendments over the preceding 12 months (each for four weeks), prior to the final two week consultation period for the third version of the amendments. Rob Heferen reiterated that Treasury generally consults for four to six weeks, but sometimes a shorter timeframe is necessary. Jennie Granger added that sometimes it is not possible to consult for a long time as administrators need to prepare for the tax cycle or there are limits in the legislative timetable.
Grant Wardell-Johnson: 20 announcements dropped off the Forward Work Program – consider saying not going to pursue them.
Yasser El-Ansary: Yesterday, Tony Regan said at the House Committee Review that the ATO and Treasury had revamped the Quality Assurance process and the delineation of responsibilities between the two organisations. Rob Heferen said that Minister Bradbury had been alerted and would make a few decisions about the allocation of responsibilities. In a few weeks' time a document would be placed on the ATO and Treasury websites.
Andrew Mills: Board of Taxation reports are not released by the Government until it has prepared its response. Maybe government should release them before it responds as that will allow policy development and assist with design of the measure. If get in early on design process, may lead to simplicity in law.
Modernising the taxation of trust income
Chris Barron outlined planned reviews of trusts including:
- the new tax system for Managed Investment Trusts;
- update and rewrite of trusts; and
- the fixed trust review.
Controlled Foreign Company (CFC) rules, transfer pricing and other business
Tony McDonald noted that the CFC rules are still a Government priority. The project has been impeded by a lack of Office of Parliamentary Counsel resources and other priorities on the legislative agenda. However, once finalised it will substantially reduce the quantity of legislative provisions and make the regime much simpler, reducing compliance costs.
Frank Drenth: Much of the Treasury website is still broken, what is going on? Luke Hickey said to get in contact about any documents that could not be accessed and that they would work on it as part of the overhaul of the Treasury website.
Robert Jeremenko: Wanted to know what was happening with Division 7A. Chris Barron said the exposure draft was already available.
Arrangements for next meeting
Rob Heferen noted that the next meeting was scheduled for some time after the 2012 MYEFO and stakeholders were encouraged to consider if they found these meeting useful and would like to continue with them.