Australia's Future Tax System

Consultation Paper

Section 8: Complexity — cost, risk and transparency

Overview

The tax-transfer system is very complex. To a degree this reflects the reality of the modern world. Some complexity is unavoidable in a system that also has equity and efficiency objectives. However, complexity adds cost and risk to day-to-day business and personal activities. It affects the choices individuals make to work, save and consume. The time and resources individuals and businesses spend understanding and complying with the tax-transfer system could be devoted to more productive or satisfying activities. Complexity also makes the system more costly to administer. These costs impact on Australia's international competitiveness and the efficient allocation of society's resources.

Complexity also reduces transparency — that is, the extent to which people understand how the system works and what it is trying to achieve. This can impact on people's attitudes to the system, including its perceived legitimacy and people's willingness to voluntarily comply.

Sources of complexity include the large number of taxes and transfers, detailed rules associated with each, the interaction between them, different jurisdictions applying similar taxes or transfers in different ways, and the way taxes and transfers are administered.

Accordingly, reducing complexity may demand: reconsideration of the range of complex policies and objectives embodied in the system; integration and streamlining its currently fragmented administration; and greater certainty, transparency and public engagement in the overall management of the system.

Consultation questions

Q8.1 Which taxes or transfers are the most complex and impose the greatest costs? How should these costs be reduced (by abolishing the taxes or transfers or by making the rules applying to them simpler)?

Q8.2 In what ways might the administration of Australia's tax-transfer system be changed to better meet the needs of individuals and businesses? How might the process of personal income tax returns be simplified, including by removing the requirement for some taxpayers to lodge returns? Should the administration of the system be more integrated (across taxes and transfers and between jurisdictions)? How might advances in technology assist?

Q8.3 To what extent might policy objectives be traded off to achieve a simpler system? In what areas should efficiency, equity or choice be traded off for simplicity?

Q8.4 How could the governance of the tax-transfer system be reformed to reduce complexity, uncertainty and cost, and to improve transparency, understanding and support for the system?

This section considers the complexity of the tax-transfer system from three perspectives:

  • the range of complex policies and objectives embodied in the system;
  • the burden of complexity; and
  • the governance of the system.

8.1 Complex policies and objectives

A significant reason for complexity in the tax-transfer system is that it has not been developed as a system. Rather, it consists of a large number of separate sophisticated elements, developed at different times, to meet different objectives and often in an uncoordinated way.

There are at least 125 different Australian taxes. Many of these are levied on essentially similar transactions by different Australian governments, with relatively little harmonisation across jurisdictions. There are also around 40 cash transfer payments paid by the Australian Government to Australians, with numerous other Australian, state and local government concessions available. In addition, there is a broad range of tax concessions, known as tax expenditures, which add complexity to the system because they complicate the law, create additional choices for people and create opportunities for tax planning. In some cases eligibility for these concessions also depends on characteristics and information that are not otherwise required for tax purposes.

Approximately 300 tax concessions were identified in the 2007 Tax Expenditures Statement (Australian Treasury 2007). Around 100 new tax expenditures have been added over the past decade.

Summary of key messages from submissions

Many submissions identify complexity as a major problem with the tax-transfer system. While most acknowledge the system will always contain some complexity, they suggest simplification should be a high priority for reform.

In particular, a large number of submissions raise concerns that there are too many taxes (including taxes imposed by different governments), which are trying to achieve too many objectives. Many submissions focus on the difficulties of making sound decisions in an uncertain environment, and suggest eliminating a range of taxes, mostly state taxes, which they perceive to be the least efficient.

In relation to individual taxpayers, submissions raise as a concern Australia's very high reliance on tax agents to complete annual tax returns. Record keeping and retention is also seen to have a high cost. Submissions provide examples of where complexity in the tax-transfer system is leading people to miss out on benefits and entitlements, due to difficulty in accessing appropriate information or poor record keeping of receipts needed for claims.

Business taxpayers strongly support reducing the number of different taxes imposed by all levels of government. A number of business groups also note that businesses which operate across states often have trouble dealing with differences in the application of essentially similar taxes, such as payroll tax. This adds to compliance costs.

Submissions from certain large business stakeholders and a number of business groups support moves to align more closely the business income tax system with accounting profit, as determined for the purpose of company financial reporting.

For small to medium businesses, there is particular concern about the detail, volume and complexity of the tax law relating to specific transactions.

Complexity in the tax-transfer system is partially a reflection of complexity in the modern world and a certain level of complexity and operating costs is inevitable to implement the tax-transfer system in a manner that is both efficient and equitable. For example, means testing is intended to ensure that transfers are targeted to those in need of assistance. However, at some point, equity or efficiency (or both) are likely to be compromised by increasing levels of complexity.

Complexity reduces the system's transparency, making it harder for people to understand their obligations and entitlements, increasing the risk of non-compliance and hindering properly informed decisions. It creates uncertainty and risk. Individuals spend time and money dealing with this uncertainty. Some individuals may arrange their affairs to minimise the complexity they have to deal with even if it means they pay more tax than necessary or do not claim transfer payments to which they are entitled. Others pay for professional advice to understand how the system applies to their circumstances.

Complexity for individuals

The complexity of the personal tax system is evidenced by the use of tax agents to lodge over 70 per cent of all individuals' tax returns. Submissions indicate that many taxpayers feel they are unable to appropriately assess their eligibility for deductions and offsets and therefore use a tax agent to ensure they are both claiming every deduction or offset available to them and not claiming deductions and offsets they are not eligible for. An example of a deduction for which individuals feel unable to assess their eligibility is self-education expenses. To be deductible these expenses must have a sufficient connection to an individual's current employment by maintaining or improving specific skills or knowledge required in the individual's current employment or being likely to result in an increase in income from the individual's current employment.

The complexity of the personal tax-transfer system also emanates from the different approaches that the tax and transfer systems take with respect to income, assets, the period of assessment, the unit of assessment and the way that categorical support is provided or liabilities imposed. Some of these differences reflect the different objectives of the two systems. These differences are described in Section 2.2.

For example, complexity has arisen because the personal tax-transfer system measures income in different ways in the pursuit of their different objectives. Section 2.2 outlines the differences in measures used to assess an individual's income tax liability versus their entitlement to transfer payments. 'Taxable income' follows the general principle that the costs incurred in producing income should not be included in the tax base, and therefore it allows for a broad range of deductions, including work-related expenses and certain superannuation contributions. In addition, some tax offsets are calculated on different income measures. In contrast, the measure of income generally used to determine entitlement to transfers such as income support payments uses a broader definition of income and is only reducible by losses and deductions in limited circumstances.

Submissions highlight that different transfer payments may apply in very similar circumstances. This can make it difficult for an individual to find out which rules apply to them, and what they mean for their choices (particularly to work or increase working hours). For example, when a child turns 16, the maximum rate of FTB Part A falls substantially and Youth Allowance becomes available for some families. Almost all low to middle-income families experience a reduction in assistance and many are faced with a choice as to which payment to claim.

Complexity for businesses

A number of areas of the tax law for businesses could be considered to be complex due to (amongst other things) the intricate types of transactions involved, the precise drafting used in the tax law to achieve intended outcomes and the length of the relevant segments of the law. Examples of such complexity defined in this way are the provisions relating to the taxation of trusts, consolidated company groups, the taxation of financial arrangements, small business tax concessions, the company loss rules and the capital gains tax provisions.

It should be noted that not all of this 'complex' tax law applies to every type of business. Some applies based on the election of the entity and other aspects apply only to certain business structures or transactions. As such, whether these provisions translate into complexity for a business will depend on its business activities.

A number of submissions suggest ways in which business income tax could be simplified. One specific proposal raised in a number of submissions is to more closely align the business income tax system with accounting profit, as determined for the purpose of company financial reporting/statements.

Most business taxpayers work out their taxable income by making a series of adjustments to their accounting profit. This reconciliation is needed because accounting profit takes into account different amounts to those relevant in working out taxable income. Some submissions note that this process can represent a significant compliance cost.

Some parts of the current income tax law recognise elements of accounting standards (for example, in the consolidation and thin capitalisation rules). A more general use of financial reports for tax purposes would raise a number of issues. For instance, it is often suggested that because taxes need to meet the revenue needs of government they cannot be as flexible as accounting standards. Accounting standards allow more subjectivity in the recognition and measurement of income (such as in the application of the accounting concept of materiality) than is currently available under income tax law. As taxpayers have an incentive to minimise their taxes, there is an argument for prescribing the measurement of income in ways that are not required for accounting purposes. Counter balancing this is an incentive for publicly listed companies to record a profit that satisfies shareholders.

Another issue with greater alignment is the concern that either financial reporting or tax outcomes would be inappropriately distorted as a result. For instance, the interpretation of accounting standards would become subject to judicial review, affecting their flexibility and possibly leading to different accounting rules between jurisdictions. Other considerations are that accounting standards may not treat the same transaction in the same way for all entities and that not all entities observe accounting standards, though for certain classes of entity adherence to accounting standards is mandatory.

Notwithstanding these issues, the greater use of accounting concepts may hold some promise for improving certainty and reducing compliance costs for those businesses that produce financial reports according to the accounting standards.

Consultation questions

Q8.1 Which taxes or transfers are the most complex and impose the greatest costs? How should these costs be reduced (by abolishing the taxes or transfers or by making the rules applying to them simpler)?

8.2 Simpler interaction with the system — who should bear the burden of complexity?

If some complexity is inevitable in the tax-transfer system, a key question is how the burden of that complexity should be allocated between the government (as administration costs) and businesses and individuals (as compliance costs).

Summary of key messages from submissions

Submissions highlight the regressive nature of compliance costs (that is, the burden of complexity may fall disproportionately on those least able, or with the least resources, to deal with it). Some call for this to be acknowledged by placing greater emphasis on simplifying taxes on small business and individuals.

Businesses operating across state boundaries express concerns about the complexity of dealing with multiple revenue authorities. Some submissions suggest transferring some or all of revenue collection responsibilities of the state revenue authorities to the Australian Taxation Office (ATO).

Some submissions suggest the level of uncertainty in Australia's tax system is creating excessive compliance risks, which are damaging our international competitiveness and inhibiting domestic business decisions. In particular, submissions argue that the need for timely, consistent and reliable advice is not always met by the ATO. These submissions consider this to be a problem of culture, focus and governance of the ATO. They propose changes in the tax administration arrangements for Australia, including the establishment of a board of directors to oversee the operation of the ATO.

A spectrum of possible approaches to improving the personal tax-transfer system is identified by submissions. At one end of this spectrum are measures to streamline or simplify existing taxes and transfers. At the other end are more radical approaches to simplifying and integrating the system.

Allocating operating costs between the administration and taxpayers

Administration costs and compliance costs can be substitutes for one another. In some cases there may be economies of scale from moving more of the revenue collection responsibility to the tax administration, which would spread the costs over all taxpayers. However, shielding taxpayers from the direct costs imposed by complexity could increase incentives to seek more complex tax arrangements and, as a result, could lead to higher overall operating costs than might otherwise be the case.

One specific issue often raised is the cost to business of withholding taxes from salary or wages paid to an employee. Collecting taxes from businesses rather than employees can save both administrative and compliance costs because of the inherent economies of scale and because businesses typically have accounting systems in place that facilitate tax reporting.

From one perspective this compliance burden is a cost of doing business, that is, it is a cost that business incurs on behalf of employees as part of the employment relationship. An alternative view is that employers are performing a collection function on behalf of the tax administration, based on them being best positioned to do so at least cost. Few countries provide explicit compensation for these collection costs, but business benefits from the time lag between when taxes are withheld and when they are remitted to the ATO. In the absence of the withholding requirement, the employees would receive their wages in full at the end of the pay period.

A specific concern of business is the extent to which it bears the burden of complexity of differences between taxes across jurisdictions. Section 9.4 considers potential approaches to streamlining the administration of the tax-transfer system across the federation.

Allocating compliance costs between businesses and individuals

When choosing how compliance costs should be allocated among different classes of taxpayers and transfer payment recipients, it is important to consider who is best placed to face these costs. In particular, an important question is how those costs are to be distributed fairly and efficiently.

It is often desirable to allocate compliance costs to businesses rather than individuals, such as in the withholding example outlined earlier. While businesses face these costs it is important to remember they are ultimately borne by the individual owners, employees or customers of the business. In most cases, the financial costs incurred in complying with tax obligations are also deductible, and so are shared with the broader community.

While businesses generally have greater capacity to deal with compliance costs than individuals, there are some circumstances in which employees are better placed to understand and meet their tax-transfer obligations. For instance, while employers withhold taxes as part of the payroll function, they are not similarly involved in the transfer payments made by government to employees. One reason for this is that determining an individual's entitlement for transfer payments requires considerably more information about an individual than would normally be available to the business.

Section 4.2 examines the issue of taxing fringe benefits in the hands of the employee, rather than the employer.

Given the regressive nature of compliance costs, some submissions propose, a separate and less complex tax system for small business. To some extent, the current tax system already treats individuals, small and large businesses differently. For instance, a range of concessional and simplified tax arrangements exist for small businesses. Some have suggested that these arrangements should be revisited to ensure compliance costs are better targeted to those who are best placed to deal with them.

Traditionally, it has been thought that individuals and small businesses have relatively simple affairs which warrant a simpler tax system than big business. However, increasingly the affairs of these taxpayers are becoming more complex. For instance, many small businesses now trade nationally and internationally and more Australians are investors, either directly or through managed funds.

There is a risk that further complexity is created by applying different types of rules to different types of taxpayers. Care needs to be taken to ensure separate sets of rules actually reduce compliance costs. For example, giving small businesses the option of calculating their liability against a 'simplified' system may encourage them to work out their liability under each of the alternative systems, and so increase their compliance costs (Shaw et al 2008).

Responsive administration

The implementation of policy by administrators can have a significant bearing on the complexity experienced by taxpayers and transfer payment recipients. In particular, there is an important role for administrators to provide certainty in the application of laws to particular circumstances. In a recent report, the Inspector-General of Taxation found that the complexity of the tax system is a significant challenge for the ATO and one reason for delays in dealing with a number of issues (IGOT 2008).

Some submissions suggest that the level of uncertainty in Australia's tax system is creating excessive compliance risks, which are damaging our international competitiveness and inhibiting domestic business decisions. In particular, submissions argue that the need for timely, consistent and reliable advice has not always been met by the ATO. These submissions suggest there is a problem with the governance of the ATO. They propose changes in the tax administration arrangements for Australia, including the establishment of a board of directors to oversee the operation of the ATO. Submissions point out that revenue authorities in the United States, Canada and the United Kingdom are overseen by boards which include external representatives from a range of different backgrounds. The submissions argue that these arrangements would ensure the ATO has a better appreciation of the need to provide certainty to taxpayers, particularly where commercial decisions rest in the balance.

Client-centred tax-transfer administration

Australia's system of self-assessment for income tax relies heavily on taxpayers (or their advisers) having a good understanding of their tax obligations and voluntarily complying with them. For example, all but $4.2 billion of $214.9 billion received by the ATO in 2004-05 was paid voluntarily.

However, taxes and transfers are administered by multiple government agencies at the Australian, state and local government levels, reflecting the process by which policy has been developed and Australia's federal system of government. These arrangements can be complex for individuals who have to deal with the different approaches used by the various government agencies.

The proportion of individual taxpayers seeking professional assistance to complete their tax returns has risen from approximately 20 per cent in 1980 to around 74 per cent in 2007. This is considerably higher than in other countries which require individuals to lodge returns. For instance, only 56 per cent of individuals in the United States complete their tax returns with professional assistance (OECD 2005). The lower use of tax agents in other OECD countries may reflect efforts in those countries to reduce the information individuals with straightforward tax affairs need to put into their returns, or efforts to remove such individuals from the tax system altogether. In Australia, one of the motivations for the increases in the low income tax offset and the introduction, and subsequent increases in the senior Australians tax offset, was to reduce the number of people with low incomes who need to lodge returns.

A more client-centred approach to tax-transfer administration would place greater weight on simplifying the experience for individual taxpayers and transfer payment recipients, making it easier for them to understand and comply with their obligations and entitlements. Improvements in information technology may create opportunities and expectations for a radically improved client interface.

Simplifying the system of personal income tax returns

There is a spectrum of changes to the personal tax system that could potentially simplify tax administration and reduce compliance costs borne by individual taxpayers (Chart 8.1).

Chart 8.1: Simplifying personal income tax returns

Chart 8.1: Simplifying personal income tax returns

The ATO currently pre-fills some data into individual's electronic income tax returns, making it easier for many individuals to complete their returns. With appropriate policy changes it may be possible to increase the amount of pre-filled data.

For example, introducing a standard tax deduction in place of work-related expenses and replacing the tax deductions for eligible gifts with a co-contribution to gift recipients would potentially mean that some individuals would need only to confirm the data in their pre-filled tax return at the end of an income year. Greater at-source withholding, complemented by policy settings that obviate the need for further assessment of tax, might further reduce the need for individuals to lodge returns.

Improving access to transfers

There is also a spectrum of changes that could potentially simplify the administration of the transfer payment system (Chart 8.2).

Chart 8.2: Simplifying administration of the transfer system

Chart 8.2: Simplifying administration of the transfer system

It can be costly for individuals to access transfer payments. In particular, determining and fulfilling the requirements for eligibility (such as filling in application forms, providing the required information, or physically attending a transfer agency) can be a time consuming and inconvenient process. Greater use of online service delivery could improve client focus, building on current work being undertaken by transfer agencies.

As is the case with the tax system, the transfer system could be further simplified through changes to policy settings. For instance, policy changes may make it possible for application forms to be better tailored to gather only the information needed to assess an individual's entitlements. This may be supported by the transfer agency accessing information from tax and other transfer agencies. This would save clients' time and improve convenience.

Finally, it may be possible for improved technology, in conjunction with additional policy refinement, to enhance information exchange between tax and transfer agencies, so that a client could have their eligibility for some transfer payments automatically determined. Clients would not need to apply for or even know about the transfer, to receive their entitlements. However, this approach could raise issues about the transparency of the transfer system.

Streamlining tax-transfer administration

Ongoing improvements in information technology, and changing attitudes to engaging with technology and the holding and use of personal information, mean that the future administration of the tax-transfer system need not be constrained by present information management practices or systems limitations.

Improvements in data-processing, data-matching and information technology systems design, coupled with the rapid uptake of new technologies by Australians, may create opportunities and expectations for a radically different client interface for a future tax-transfer system (Box 8.1).

Box 8.1 A single client interface with the tax-transfer system

A more client centred tax-transfer system could potentially involve a single interface with individuals. Under this approach, individuals might deal with government through just one organisation. This could effectively shield individuals from much of the complexity of the tax-transfer system, minimising their compliance costs.

This approach might consist of a single government agency that would administer all taxes and transfers that are relevant to individuals. Alternatively, the single interface might be a public or private institution, which intermediates between individuals and several government agencies responsible for administering different taxes and transfers. The single interface might support a single account for each individual, through which all taxes and transfer payments are administered.

The individual, their employer and other third parties could provide all relevant information to a central agency, which would determine the individual's tax liabilities and/or entitlement to transfer payments. This might be done by way of an internet-based interface with other support for people less familiar with such technology. The benefits of this approach, including policy transparency, may be further extended by linking other features to the account, such as tax and transfer calculators and financial planning tools.

The potential benefit derived from such an approach may depend on the acceptance of policy changes required to streamline and simplify the relationship between individuals and governments. A further consideration is the community acceptance of a single agency holding significant information about its clients, and whether it is possible for one agency to administer such a broad area of responsibility while maintaining service standards.

Consultation questions

Q8.2 In what ways might the administration of Australia's tax-transfer system be changed to better meet the needs of individuals and businesses? How might the process of personal income tax returns be simplified, including by removing the requirement for some taxpayers to lodge returns? Should the administration of the system be more integrated (across taxes and transfers and between jurisdictions)? How might advances in technology assist?

Q8.3 To what extent might policy objectives be traded off to achieve a simpler system? In what areas should efficiency, equity or choice be traded off for simplicity?

8.3 Certainty and transparency in the running of the system

The governance of the design, maintenance and administration of the tax-transfer system influences the priority given to simplicity relative to other objectives and can protect the system from the gradual erosion of the benefits of reform. Submissions raise a range of factors likely to support sound governance of the system.

Summary of key messages from submissions

A common theme in submissions is the need for the tax policy process to be more open and transparent, particularly around the trade-offs between efficiency, equity and simplicity. In expressing these views, submissions welcome the recent government announcement to engage the private sector earlier in the policy and legislative design process.

Submissions identify the lack of a guiding plan with clearly articulated objectives as one of the chief contributors of tax system complexity. The absence of a plan leads to ad hoc and uncoordinated changes, increasing the risk of unintended consequences, including imposing complexity and compliance costs. In doing so, submissions point to the need for the institutions and processes of the tax-transfer system to exhibit transparency, stability, accountability and certainty.

Some submissions note there has been considerable investment by many in understanding and applying the current system, that changes to the system can involve significant upheaval, and that these costs need to be taken into account. Some propose that more explicit consideration be given to the costs imposed by change at the policy design stage. Other submissions propose the amount of change to the system be limited, so minimising uncertainty.

Further, a number of submissions call for a greater commitment to identifying and monitoring tax compliance costs. Certain submissions call for these costs to be estimated, reported, monitored and reduced.

A few submissions also consider the current large number and type of tax expenditures to be adding to tax system complexity and reducing transparency. Submissions put forward solutions including reviewing, reducing or abolishing the tax expenditures.

Transparency and community engagement

The making of a sound tax-transfer system relies on a well-informed community that can hold governments to account. The current complexity of the tax-transfer system makes it hard for people to understand the way it operates and to think about the way it should. At the same time, there is a limit to how well-informed the general community can be and should be, as it is costly to gain this information when complexity is inevitable.

Policy development can benefit from a broad consultative approach, which helps to ensure that a range of perspectives are brought to an issue, thereby reducing the potential for policy to be developed without the benefit of knowing its broader impact. Such transparency has the potential to reduce the complexity of the system by ensuring that compliance costs are taken into account and that other practical ramifications of a policy are understood before it is implemented. However, consultation is not a panacea for complexity in policy design, and can result in increased complexity.

In August 2008, the Australian Government announced that consultation would occur throughout the tax design process, including before the Government announces its decision to legislate. These changes aim to improve the contribution that the private sector can make to the development of tax policy and legislation. Submissions have welcomed this approach, but some note that the complexity of the system means that consultation is unlikely to guarantee that all implications of a new policy are identified before it is put into operation.

Taking a whole-of-system view

Rather than thinking of tax-transfer policy in an integrated way, we have become accustomed to considering elements of the system separately. The complexity of the system forces a compartmentalised approach to policy, that is, it is difficult to consider the myriad of interactions across all the different dimensions of the system. While it is important to understand the effect of individual policies, it is the combined effects of all tax-transfer policies that matter when trying to strike the right balance between simplicity and other objectives.

From time to time, attempts have been made to reduce the complexity and operating costs of the system. These have tended to focus on refining existing elements of the system, rather than looking to fundamentally reshape the system. That is, many attempts to reduce complexity have concentrated on identifying excessive compliance burdens that could be reduced without considering the basic policy design. Periodic, whole-of-system review creates opportunities to explore reforms that could offer more equitable and efficient outcomes at the same time as reducing complexity. It also presents a chance to take a systemic view of any trade-offs between simplicity, equity and efficiency, to ensure the right balance is achieved.

The frequency and impact of change

Uncertainty can be compounded by the rate of change in the tax-transfer system. The higher the rate of change, the more difficult and time consuming it can be for people to understand their obligations and entitlements under the system. This instability in the tax-transfer system may also reduce efficiency by affecting the expected payoffs to long-term investment decisions, such as investment in education, retirement products, long-lived productive assets or choice of business structure.

Some submissions note there has been considerable investment by many in understanding and applying the current system. Changing the system can involve significant upheaval and these costs need to be taken into account. However, what ultimately matters is how the system can be improved for the benefit of the whole community, including future participants of the tax-transfer system, not just for those who have established an understanding of the existing system. Nevertheless, when considering proposals for change it is important to consider the relationship between the short-term costs of change and the long term benefits of reform.

Monitoring compliance costs

Traditionally, compliance costs have not received the same attention as the equity and efficiency implications of tax and transfer policies. Some submissions call for a greater commitment to identifying and monitoring compliance costs. The Architecture paper notes that there are no reliable estimates of the complexity or operating costs of the tax-transfer system. Some submissions call for these costs to be estimated, reported, monitored and reduced.

Reporting of the compliance cost impact of new tax legislation began in 1996. Regulation impact assessment has since been mandatory for any regulatory proposal affecting business. In 2006, the Taskforce on Reducing Regulatory Burdens on Business reported that the requirements had often been circumvented or treated as an afterthought, and so had not realised their potential to improve the quality of regulation. Following recommendations of the Taskforce, the Australian Government strengthened requirements for regulatory assessments, especially at the time that policy is being decided (Office of Best Practice Regulation Handbook, 2007).

Recently, a number of state governments have adopted specific targets to reduce the total burden of their regulation. The Australian Government has focused on specific reform projects, rather than pursue a general target. It has, however, endorsed a 'one in one out' principle to address the cumulative burden of increasing regulation.

Review of tax expenditures

Australia, like many OECD countries, reports tax expenditures annually. The publication of tax expenditures can facilitate their review and assessment, and help to determine whether their objectives are being met at a reasonable cost and in the interests of the community in general.

A more direct approach to ensure that tax expenditures are regularly reviewed could be to subject them to a sunset clause, after which they would automatically lapse unless a decision is taken to renew them. Currently sunset clauses apply in relation to most delegated legislation, but not in relation to Acts of Parliament where most tax expenditures arise. Sunset clauses may reduce complexity by ensuring that tax expenditures remain in the system only as long as they are actively justified. This would provide a useful housekeeping mechanism for rationalising unnecessary concessions. However, it might not be appropriate for significant and longstanding elements of the tax system to be subject to a sunset. This could introduce considerable uncertainty into the system, with costs that exceed the benefits.

Some submissions suggest that to simplify the tax system, tax expenditures that lack strong public policy justification should be abolished. Another approach to reduce the number of tax expenditures would be to replace them with equivalent government outlay programs. This would improve the tax system, but it may not reduce the overall level of complexity and operating costs imposed by government. In some cases, the tax system is a more efficient means of delivering policy than an equivalent expenditure program.

Key issue/policy directions for consultation

Q8.4 How could the governance of the tax-transfer system be reformed to reduce complexity, uncertainty and cost, and to improve transparency, understanding and support for the system?