Australia's Future Tax System

Consultation Paper Summary

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?

Key messages in submissions

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

In particular, many raise concerns that there are too many taxes (state and federal) trying to achieve too many objectives. They suggest eliminating a range of taxes, mostly state taxes, which they perceive to be the least efficient. A number of business groups also noted that businesses that operate across States often have trouble dealing with differences in the application of taxes such as payroll tax and this adds to compliance costs.

In relation to individual taxpayers, submissions are concerned about Australia's very high reliance on tax agents. Record keeping and retention are also seen to have a high cost. Examples are given where people miss out on benefits due to difficulty in finding the right information or onerous record keeping requirements.

Submissions from big business and many business groups argue that the business tax system should be more closely aligned to accounting profit. Businesses operating across state boundaries express concern about having to deal with multiple revenue authorities. Some submissions suggest transferring some or all of the revenue collection responsibilities of state revenue authorities to the Australian Taxation Office (ATO).

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

There is concern that the burden of complexity falls disproportionately on those least able to deal with it). Some called for this to be acknowledged by placing greater emphasis on simplifying taxes on small business and the tax‑transfer system for individuals.

Some submissions suggest that uncertainty in the system is creating excessive compliance risks, which are damaging international competitiveness and inhibiting business. In particular, it is argued that the ATO does not always provide timely, consistent and reliable advice. These submissions suggest this is a problem of culture, focus and governance. They propose changes in tax administration, including the establishment of a board of directors to oversee the operation of the ATO.

Submissions propose various ways to improve interaction with the system for individuals. 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.

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. Submissions also identify the lack of a guiding plan as one of the chief contributors to tax system complexity. The absence of a plan leads to ad hoc changes, increasing the risk of unintended consequences and increasing complexity and compliance costs. Submissions highlight the need for transparency, stability, accountability and certainty in the institutions of the tax‑transfer system.