Q: Would the tax value method make existing

case law and rulings irrelevant?

The argument is that we get an absolute benefit from accumulated judicial
analysis of the current law and from the rulings on it.

A:
 Many cases and rulings would remain relevant because the tax value

method would only change some of the current law, not everything.

o Many ideas would be re-used. For example, the case law and rulings

on the difference between a repair and an improvement would still

be useful because the tax value method would re-use that

distinction.

 Analysis of a system is only useful if the system is retained. To the extent

that the tax value method replaces parts of the system with something

better, the loss of case law on those parts should not matter.

 Any fear that the loss of case law would plunge us into doubt, because

there would be less certainty in the law, is unfounded.

o The areas most analysed are revenue versus capital issues. While

some general conclusions can be drawn from those cases, there is

no certainty emerging from them. Issues continue to arise. The tests

used by the courts to answer them are many, have evolved or even
 changed radically over time, and often conflict with each other. The

cases are often useful only for their particular circumstances.

o Most areas of the law have had little or no judicial consideration.

 Even if there were a short term loss of certainty, the longer term benefits

of simplifying the law would still make the tax value method worthwhile.

 Preliminary analysis of the draft tax value method investment asset rules

(currently capital gains tax) indicates there could be a significant

reduction in the need for rulings and determinations and litigation leading

to real benefits for the community and the Australian Taxation Office.

Back to top

Tax value method advantages

Q: How would adopting the tax value method

simplify the income tax system?

A:
 The tax value method would simplify the income tax system because the

tax value method is based on as few, and as simple, concepts and

mechanisms as possible.
 o The current law has many different ways of assessing gains and

recognising losses for tax purposes; the tax value method would

have one standard way.

 Some complexity in the tax law is necessary to give appropriate treatment

to the variety of business activities.

o But much of the existing complexity is unnecessary because it

reflects the ad hoc development of income tax law over the last

century.

 The redraft of key capital gains tax rules into the tax value method format

is an example of the significant simplification possible under the tax value

method.

o So far, the tax value method redraft has reduced the size of the key

capital gains tax rules by more than 70 per cent and will reduce 40

capital gains tax events to 8 at most.

 Simplifying and reducing the size of the current tax law should lower the

cost to comply with and administer the law.

Further information
 The redraft of capital gains tax into tax value method investment asset

rules has so far dealt with the key issues of the capital gains tax discount
 and capital loss quarantining. This has reduced 126 pages of the current

law to 32 under the tax value method.

 The capital gains tax events have been reduced to 3 under the tax value

method redraft. However, 5 others will need to be considered further as

drafting proceeds.

Back to top

Q: How would adopting the tax value method add

to certainty in the income tax system?

A:
 The tax value method would add to certainty in the income tax system

because it would replace the ad hoc approach the current law takes to

transactions with a standard treatment that applies to all transactions in

the same way.

o The current law has grown to accommodate expansion of the tax

base by adding new regimes. The regimes seldom deal with issues in

a standard way.

o The tax value method proposes one standard regime that deals with

all transactions in the same way.

  Because there would be fewer variations to learn, it would be easier to

reliably predict how the tax law would treat any particular transaction.

 The tax value method would also replace woolly judicial tests, like

whether an expense is of an income or a capital nature, with more definite

tests, like whether the expense generates an asset.

o For example, if a taxpayer sells a future income stream (as

happened in the Myer Emporium case), there are 5 different

treatments available under the current law that could cover it.

o These treatments do not produce consistent results, so it is not

clear how the law deals with them.

o Under the tax value method, this transaction would be treated in

just one way.

Further information
 The Board of Taxation has arranged for Professor Cooper of Melbourne

University, in conjunction with the ANU’s Centre for Tax System Integrity,

to test the tax value method provisions against their current law

equivalents to see if certainty is improved.

 A detailed analysis of the Myer Emporium case, explaining how it is

treated under the current law and how tax value method would treat it,
 can be found at Attachment A to Tax value method: information paper. This

paper is on the Board website www.taxboard.gov.au.

Back to top

Q: How would adopting the tax value method

make the income tax system more durable?

A:
 The tax value method would make the income tax system more durable

because it completely describes the tax base.

o Changes to the law would only be necessary when you want to add

to or reduce taxable income. Unless the tax base is contracting,

those things are fairly uncommon.

 The current law is not durable because it doesn’t completely describe the

tax base. Whenever something else has to be made assessable or

deductible, the law has to be amended.

 The standard tax value method treatment produces appropriate economic

outcomes. The default treatment under the current law often produces

inappropriate outcomes (for example, legitimate business expenses that

are not deductible at all – the so-called ‘black hole expenses’).

 o Inappropriate outcomes lead to the need for frequent legislative

amendment.

 As an example, in 1999, 3 new regimes had to be added to the law to cope

with expenditure on developing software, on rights to use submarine

cables and on spectrum licenses.

o These were things that had grown out of technological

developments and, so, were not covered by the existing law.

o If the tax value method had been in place, the expenditure would

have reduced taxable income without a need to amend the law.

Further information
 The Australian Taxation Office’s TVM Centre of Expertise has begun to

evaluate improvements in durability by examining what proportion of

recent changes to the law would have been necessary had the tax value

method been in place.

Back to top

Q: How would adopting the tax value method

make the income tax system more transparent?

A:
  The tax value method would make the income tax system more

transparent because it has one standard way of doing things. It would be

easy to identify departures from the standard way.

o For example, the main way of increasing tax under the tax value

method (other than just raising the rates) would be to change an

asset or liability’s tax value. Such a change would be very obvious.

 Knowing that there is a change from the norm is a necessary step in

understanding why the change was made.

o That a change is more widely known would increase demand for a

detailed explanation of the reasons for it.

Further information
 Comprehensive testing of transparency will commence when more

complete drafting (especially in non-core areas) allows the testing to be

more useful.