Australia's Future Tax System

Final Report: Detailed Analysis

Chapter G: Institutions, governance and administration

G1. A responsive and accountable tax system

G1–1 A responsive tax system

The tax system is a fundamental part of Australia's social and economic infrastructure. The operation of the system should reflect the type of society Australians want and the role of government in that society. It will not be feasible for the tax system to be reformed in a single step to accord with the vision laid out in this Report. And even once it has been reformed, the objectives for the tax system may need to be adjusted in response to changes in understanding, priorities, technology or the economy.

The tax system needs to keep pace with these developments so that it does not unnecessarily impede Australian businesses in competing internationally, and supports the nation's capacity to attract overseas investment.

The tax system operates through a number of institutions that together design and implement tax policy and govern administration of the system. These include parliamentary, executive and judicial bodies. In combination, these institutions, and the relationships between them, influence how taxpayers experience the system. As in other areas examined by the Review, it is clear that the institutional architecture of the tax system has been developed incrementally, and in some respects it does not operate in a fully coherent and effective whole. The Review has examined these arrangements from a whole-of-system perspective to see whether they are capable of meeting the demands of the coming decades.

Principles for responsive policy and law

The tax system needs to reflect and support Australia's social and economic objectives because it exerts a powerful influence on social and economic outcomes.

While timely changes are necessary to ensure that the system remains relevant, change is a costly process and can create significant uncertainty. The higher the rate of change, the more difficult it is for people to understand their rights and obligations. Changing the system can involve significant upheaval. These costs need to be taken into account when changes are under consideration. So, while the system needs to adapt to changing circumstances and expectations, the features that work well should remain stable. In practice, this is a difficult balance to achieve.

Somewhat perversely, the desire for certainty can also be a significant source of instability in the system. A high level of precision in the tax law can provide the certainty needed to make the best decisions at lower cost and with lower risk. However, while prescriptive rules can provide immediate certainty to anticipated issues, they are usually not flexible enough to cover other similar cases that arise later. They also risk producing unintended consequences.

Without careful management, tax changes can have significant unintended impacts on individuals, businesses and the wider economy. At times, policies are developed without fully anticipating their impact, such as when they inadvertently disrupt longstanding arrangements or cause uncertainty. Policy-makers need to recognise the potential consequences of changes in policy and law, particularly when complex business arrangements are involved.

The system needs effective mechanisms for identifying and addressing uncertainty. A transparent and accountable process, by which users of the system can raise issues with government and receive feedback on their representations, is necessary for the ongoing health and maintenance of the tax system.

A consultative approach to developing policy and legislation can help ensure the system responds to the needs and expectations of the community. It provides stakeholders with an opportunity to inform policy-makers about the impact of the tax system on their different circumstances. It allows governments to benefit from the practical experience, skills and knowledge of stakeholders and incorporate this into policy design. This helps generate better targeted and more practical solutions. It also gives governments more information about the range of options available and the benefits, costs and risks associated with those options.

Principles for responsive administration

It is important for the tax authority to administer the tax system in a way that builds community confidence. The way taxpayers interact with the tax authority affects public perceptions of the system and the degree of voluntary compliance with the tax law. The tax authority should help people understand their rights and obligations and make it as easy as possible for them to comply with their obligations.

While the tax authority should support people who are trying to comply, it has a responsibility to apply the law firmly to people who do not. The community needs to have confidence in the fairness and integrity of the system — that everyone is paying their fair share. When taxpayers perceive that others are avoiding or evading taxes, they are less inclined to pay taxes themselves.

The administration of the tax laws can have a significant bearing on the level of certainty taxpayers have about their obligations. A challenge for the tax authority is to be responsive to the individual circumstances of taxpayers while at the same time being fair and consistent. Timely and consistent advice and self-help products that taxpayers can rely on reduce the uncertainty associated with complex laws. However, complexity in the tax system can be as much of a challenge for the tax authority as it is for taxpayers.

The administration of the tax system can benefit significantly from experiences and perspectives developed in the private sector. A consultative approach can contribute greatly to the tax authority's ability to understand the position and perspectives of taxpayers. In particular, consultation can help the tax authority take compliance costs into account when designing and implementing its administrative systems. Consultation also promotes a common understanding of the role and responsibilities of the tax authority, which helps build community trust and respect for the system.

Principles

The tax system needs to be flexible enough to respond to economic and social change in a timely way, while offering stability and certainty. The system needs effective mechanisms for identifying and addressing areas of uncertainty. In particular, the tax system should have an open and inclusive process by which the community can raise issues and see itself as having a responsibility and interest in doing so.

Tax policy, legislation and administration should be developed using a consultative, transparent approach to help achieve better targeted and more practical solutions, reduce unintended consequences and support community confidence in the system.

Taxpayers should be able to organise their affairs with good information about the tax consequences. While the tax authority should support people who are trying to comply, it has a responsibility to apply the law firmly to people who do not.

How responsive is the current system?

The operation of Australia's tax system is fundamentally sound and there is general confidence in the system. Voluntary compliance is at a high level, reflecting positive perceptions about the fairness and integrity of the system and the way it is administered. A relatively transparent and participatory approach to the development of policy and legislation has helped establish and maintain a sound framework that has served Australia well. The vast majority of taxpayers (86 per cent of individuals and 90 per cent of businesses) consider that the ATO is doing a good job (ATO 2009b). The ATO has developed a positive reputation internationally and is widely regarded as one of the leading tax authorities (JCPAA 2008). Much of the institutional architecture of the existing tax system will continue to perform well. However, a number of changes should be made to increase our ability to meet future challenges.

An increasingly open approach to designing and administering the system

An increasingly open, inclusive and consultative approach to the development of policy, legislation and administration is helping to identify, develop and implement changes needed in the system. These approaches can reduce the number of unintended consequences, as well as helping to recognise and address the ones that do arise.

The ATO has developed extensive consultation arrangements to help it administer the tax system fairly and efficiently. It has around 50 consultative forums for taxpayers, businesses and tax professionals (ATO 2009b).

Extensive consultation arrangements also exist in the tax design process. Since 2002, there has been formal consultation on most substantive tax measures. In 2008, the Government announced changes to the consultation arrangements for tax policy and legislation. These focused on making consultation more accessible, inclusive and transparent, to improve the contribution that the private sector makes to the development of the tax system. The key change was to increase the involvement of the private sector at the initial policy design stage to reduce the likelihood of unanticipated consequences.

In addition to the range of consultative forums (such as the ATO's National Tax Liaison Group) that enable organisations, businesses and tax professionals to raise views about the operation of the tax system, the community can raise issues through a number of avenues.

  • People can write directly to ministers at any time. However, neither the letters nor the Minister's responses are generally published.
  • Each year the government invites the public to submit ideas for the Budget, including ideas for tax changes. Submissions are not published and detailed responses are not routinely provided.
  • People, including professional bodies, can also raise minor policy and administrative issues relating to the care and maintenance of the tax system through the Tax Issues Entry System, a website jointly operated by the Treasury and the ATO. It includes a register of issues raised and details on whether, and how, each issue is being addressed.

So, while there are several ways in which the community can raise problems with the tax system, it is sometimes unclear which is the best way. It can also be unclear whether an issue has been previously considered by the government. The same issue may be raised a number of times by different parties, because the government's position is not publicly known.

The impacts of complexity on the system

The tax system is excessively complex. The current tax law is a morass of technical detail — for example, the income tax law now extends to almost 6,000 pages, despite the repeal of more than 4,100 pages of inoperative income and other tax law in 2006. It has reached a point where any change to the law is as much about dealing with the interactions between the change and the existing system, as it is about the change itself. This generates uncertainty about the way the system operates and the way it should operate. This uncertainty tends to reduce trust between stakeholders in the system. At worst, this can undermine confidence in the integrity and legitimacy of the system.

Complexity reduces the system's transparency, makes it harder for taxpayers to understand their obligations, increases the risk of non-compliance and hinders the making of properly informed decisions. It creates uncertainty and risk, which taxpayers spend time and money dealing with. Some taxpayers arrange their affairs to take advantage of the complexity and its unintended consequences.

To some extent, the complexity of the tax system reflects the complexity of the wider world. Over time, policy objectives have also tended to become more sophisticated, including many different treatments for specific groups of taxpayers. Cultural issues are also an important cause, as well as a symptom, of complexity and uncertainty. The culture of the tax system is a subset of the wider national culture. It reflects the community's recognition of the connection between taxes and the supply of government services. It has emerged from the historical approach to imposing taxes together with the way taxpayers and government interact according to prevailing values like trust and a sense of obligation. The vast majority of taxpayers recognise and accept their tax obligations, but the nature of the tax system means there will always be some tension between taxpayers and the tax authorities. The challenge is how to moderate the impacts of these inherent tensions in the system.

The administration of the income tax system follows a process of self-assessment. Self-assessment was introduced in the 1986–87 income year to improve system efficiency — it shifted the ATO's focus from processing returns to helping taxpayers to comply with the law and taking enforcement action against those who do not. The introduction of self-assessment shifted the distribution of cost and risk between the government and taxpayers. It exposed taxpayers to more risk by removing some of the finality of the assessment process. As the tax laws have become more complex, self-assessment has also exposed some taxpayers with more complicated affairs to greater compliance costs.

To address concerns about the imbalance of cost and risk created by self-assessment, a system of binding rulings was introduced in 1992 to give taxpayers greater certainty about the application of the law and to reduce penalties. Further refinements have been undertaken since. Treasury's 2004 review of self-assessment led to changes that made even more ATO advice binding; it also reduced the periods in which the ATO can amend assessments, and reduced the interest payable in some cases. More recently, the ATO has entered into Advance Compliance Agreements with some large businesses to provide them with the real-time certainty they need. The ATO also offers a priority rulings process for commercially significant and time-sensitive transactions.

Under the system of income tax self-assessment the ATO advises and guides taxpayers about their obligations and applies the law to collect revenue. More broadly, the ATO also seeks to create an environment that is increasingly conducive to high levels of compliance. This involves helping people to understand their rights and responsibilities, making it as easy as possible for people to comply with the law, and providing an effective deterrence to non-compliance to support honest taxpayers. In addition, the ATO plays a role in safeguarding Australians' retirement income through its administration of significant aspects of the superannuation system. It also promotes online dealings between government and business through its stewardship of the Australian Business Register.

Self-assessment places great importance on taxpayers having a good understanding of the tax law and voluntarily complying. As the tax system has become more complex, ATO advice has taken on a more significant status, as taxpayers (and advisers) in more complex matters may not have the capacity to understand the tax law.

Paradoxically, the pursuit of certainty about tax obligations and entitlements has itself become a source of the complexity. Some larger businesses are increasingly looking for the comfort of prescriptive legislation or rulings to give them certainty about the tax treatment of their particular arrangements. This has increased the size and complexity of the law and of ATO rulings.

The complexity of the system also affects the way the Treasury develops policy and legislation, and the ATO approach to interpreting the law. Often taxpayers criticise the laws for being too comprehensive and taking a disproportionate approach to addressing the revenue risks of tax avoidance. Accepting some degree of greater risk in this regard could ease complexity and make it easier to change the law when necessary. However, in an environment where some taxpayers actively use the complexity of the tax system for tax avoidance, the Treasury and the ATO are cautious about establishing precedents that could compromise the integrity of the system.

Submissions to the Review by some segments of the large business community have suggested that the level of uncertainty in the tax system is creating excessive compliance risks. In particular, these submissions have argued that the ATO does not always meet the need for timely, consistent and reliable advice. The ATO has also been criticised for not recognising the commercial impact of its decisions. In particular, these taxpayers argue that the ATO has sometimes undermined certainty by revisiting long-settled interpretations of the law or changing its established administrative practices — the Inspector-General of Taxation is currently reviewing these issues.

A further dynamic is the relationship between the Treasury and the ATO. The Treasury is responsible for advising the government on tax policy and the ATO is responsible for administering the law. However, there is unavoidably a grey area at the boundary between these responsibilities. It is sometimes unclear whether a solution to a problem lies in policy or administration. A lack of transparency and accountability for issues at the boundary means that the tax system is not as responsive as it could be. Before 2002, the ATO was responsible for designing, as well as administering, tax legislation. In 2002, this function was transferred to the Treasury, which already had policy responsibility. This change was made to bring accountability for tax policy and legislative design more directly under ministerial control and to reinforce the need for a whole-of-government perspective in tax law design. While this goal has largely been achieved, some perceive that the change has reduced the ability of ATO to administer the law purposively since it is less intimately involved in the development of tax policy. However, while the Treasury has responsibility for designing the tax laws, in most cases the ATO continues to participate in all stages of the tax policy and legislation design process. The Government formalised this involvement in 2008, deciding that tax measures should be developed by a tri-partite team comprising Treasury, the ATO and the private sector. This arrangement allows the ATO to contribute to, and understand, the policy objective of new laws. Beyond this, the ATO can also consult with the Treasury in forming its view on the interpretation of law. While Treasury views are not determinative, the ATO considers them along with the views of other stakeholders in arriving at a purposive interpretation of the law. However, as these have been treated as confidential communications within the government, the arrangements lack transparency.

Findings

The operation of Australia's tax system is fundamentally sound and there is considerable evidence of general confidence in the system. There is an increasingly open, inclusive and consultative approach to the development of tax policy and legislation and the administration of the system. While there are several ways in which the community can raise problems with the tax system, the best way is sometimes unclear.

The complexity of the current system imposes considerable costs on the community. It has exposed both taxpayers and government to higher levels of risk and uncertainty. This has led to behaviours that add to the cycle of increasing complexity. The level of complexity is such that considerable attention is needed to ensure that the system is operating as intended. There is a need for a process to identify and resolve problems quickly and transparently. There is also a need for greater transparency about the policy objective of the tax laws.

Making the tax system more responsive

Some complexity and uncertainty in a tax system is inevitable. In particular, large business taxpayers that have sophisticated arrangements and that operate in a vibrant globalised economy will always face significant complexity. In these cases, there is a need for a process to identify and resolve the areas of greatest uncertainty quickly.

To stem the growing complexity and uncertainty experienced by large businesses, there needs to be greater collaboration, trust and understanding between them, the Treasury and the ATO. This ultimately depends on the values and behaviours exhibited by both taxpayers and government. While consultation arrangements can help, other institutional reforms may be needed to rebalance the dynamics of the system to support the desired cultural changes. In particular, a more transparent system has the potential to build the confidence needed to support a system where there is less complexity and uncertainty and an increased willingness to accept the risk that does exist.

Recommendation 111:

The government should establish a more transparent means of dealing with community ideas about the tax system by extending the Tax Issues Entry System website and further developing its use.

Recommendation 112:

The government should commit to a principles-based approach to tax law design as a way of addressing the growing volume and complexity of tax legislation, and as a way of helping those laws to be interpreted consistently with their policy objectives.

Recommendation 113:

The Board of Taxation should be empowered to initiate its own reviews of how current tax policies and laws are operating, in consultation with the government. This would be in addition to reviewing matters referred to it by the government, though it should not engage in substantive policy development unless requested by the government.

In giving effect to these changes to the nature and functions of the Board, the government should ensure that the Board has adequate resources (including its own permanent secretariat). The government should also consider:

  1. how to manage the increased workload for the Board, including whether the Board would require further members and/or members who can devote more time to the Board;
  2. whether the Secretary to the Treasury, the Commissioner of Taxation, and the First Parliamentary Counsel should be appointed as advisers to the Board, rather than as members; and
  3. whether the Inspector-General of Taxation, the Auditor-General, the Commonwealth Ombudsman and the Chair of the Tax Practitioners Board should be appointed as advisers to the Board.

Recommendation 114:

Information or advice provided by Treasury to assist the ATO in determining the purpose or object of the law, or materials used by the ATO to determine policy intent (other than correspondence with or from government) should be made public.

A more transparent approach to community ideas for tax changes

The community can already raise ideas for changes to the tax system in number of ways, but there needs to be a more transparent approach to dealing with those ideas. This would increase community understanding of, and participation in, the tax design process.

Greater transparency would be achieved by extending the Tax Issues Entry System website so that it records community suggestions about substantive tax policy issues, as well as minor policy and administrative issues (see Recommendation 111).

This would offer another easy way for people to raise issues with government, but it would not replace the existing avenues. In particular, people could continue to write directly to government raising concerns and suggesting ways to redress those concerns (including making Budget submissions).

A more principles-based approach to designing the tax system

As discussed above, a major source of complexity in the current system is the way policies are designed. Over time, policy objectives have tended to become more sophisticated. Policies have also tended to be changed in isolation, and without a coherent framework for the whole system. This has complicated the tax laws and made tax compliance and administration more difficult.

While policy design needs to place a premium on reducing complexity, this alone is not enough to ensure that taxpayers will experience a more certain system. The way in which the laws are designed, and the administrative approach taken to implementing those laws, also influence the level of complexity experienced by taxpayers.

As one way of addressing the growing volume and complexity of tax legislation and to reduce unintended consequences, the drafting approach used for recent tax legislation reflects a preference for more principles-based rules — which emphasise the policy objective the law is trying to achieve, rather than simply describing the legal mechanisms and concepts for producing that objective.

A principles-based approach to designing the tax laws has the potential to stem the cycle of increasing complexity by building a more stable platform on which to base the system. By making the policy objective of the laws clear, the approach can help the laws to be interpreted consistently with the policy objective and reduce the incidence of unintended consequences. The approach can also produce rules that apply properly to the changing arrangements of taxpayers without the need for constant amendment. In these ways, the principles-based approach can make our tax laws more certain and sustainable in the long-term. The government should continue to pursue a principles-based approach to tax law design (see Recommendation 112).

As noted above, the length and complexity of the tax laws impose considerable costs on the community. All participants in the tax system — taxpayers, government, Parliament and the courts — bear and contribute to these costs. A better understanding of the costs associated with the traditional black-letter approach to designing tax laws (particularly the cumulative long-term costs) will put into perspective the short-term risks and costs of moving to a principles-based approach. The institutional changes recommended elsewhere in this section will improve transparency in the system, which should help support the levels of trust needed to accept the risks of a changed approach.

A 'circuit breaker' in the system — an expanded role for the Board of Taxation

Policy and administrative issues need to be resolved in a more timely way to provide taxpayers with greater practical certainty. Independent views of the system help to identify and resolve these issues. To some extent the Australian National Audit Office (ANAO), the Ombudsman, the Joint Committee on Public Accounts and Audit (JCPAA), the Board of Taxation and the Inspector-General of Taxation perform this kind of role in different areas. The Board undertakes tax policy and legislation reviews at the request of the government, though it can also suggest areas of review to the government. The Inspector-General can initiate reviews of systemic tax administration issues. To date, neither the Board nor the Inspector-General has had a role in initiating reviews of policy and legislation, although the Board does undertake post-implementation reviews if asked by the government.

Box G1-1: Board of Taxation

The Board of Taxation is a non-statutory advisory body that contributes a business and broader community perspective to improving the design and operation of the tax laws. The Board advises the Treasurer on improvements to the general integrity and functioning of the tax system and commissions research on tax matters approved or referred to it by the Treasurer.

The Board comprises ten members, seven of whom have been appointed from the private sector. There are three public sector members — the Secretary to the Treasury, the Commissioner of Taxation and the First Parliamentary Counsel. The Board is supported by a secretariat drawn from the Treasury, the ATO and the private sector. The Board also makes extensive use of consultants from the private sector and academia.

The Board does not make tax policy — that is the responsibility of the government. Similarly, the Board has no authority to direct the Commissioner of Taxation on how to administer the tax laws. Nevertheless, the Board has a wide role in advising the Treasurer on the development, implementation and ongoing operation of the tax laws. In particular, one of the functions of the Board is to conduct post-implementation reviews of legislation to assess its quality and effectiveness in achieving its intended effect.

The Board has made a valuable contribution to improving the tax system. One measure of that success has been the very high rate at which its recommendations have been accepted and implemented by successive governments.

Since its inception in 2000, the Board has produced 16 reports on tax issues that affect individuals, welfare organisations, and small and large businesses. Some of the significant events that have followed the Board's recommendations include: the repeal of over 4,100 pages of inoperative tax law; the reform of international tax arrangements; the establishment of the office of the Inspector-General of Taxation; and the government commitment to consult on substantive tax measures. The Board's advice also informed government decisions not to codify the common law definition of a 'charity', not to proceed with the taxation of trusts as companies, and not to proceed with the tax value method for calculating taxable income.

The Board is well positioned to understand stakeholders' concerns about, and priorities for, the tax system. It has advised the government in the interests of all Australians — it has not acted as a lobby group for special interests, nor has it been a rubber stamp for government proposals. The Board has arrived at its advice and recommendations independently, though it has worked closely with the Treasury and the ATO. These are considerable strengths of the Board, which have supported its achievements to date. The Review considers that the Board could make an even greater contribution if it was given an expanded role. However, this should be done in a way that preserves the features that have made the Board successful in the past.

The Board should be able to initiate its own reviews of lower order tax policy issues, in consultation with the government (see Recommendation 113). In this way, the Board would be positioned to act as a 'circuit breaker' in the system — to quickly identify and propose solutions for lower order policy issues relating to problems experienced by taxpayers given their varying and complex circumstances. However, the Board should not engage in substantive policy development unless requested by the government.

While the Board already can, and does, suggest areas of review to the government, it requires a formal reference from the government. The Board should be expressly permitted to initiate its own reviews, albeit in consultation with the government. Consultation would ensure that the government is aware of the Board's activities and ensure that the Board is conscious of the government's priorities. This would balance the need for a timely review of issues against the desirability that this review is relevant and effective.

This would improve transparency and accountability for issues that remain unresolved due to uncertainty about whether a legislative remedy is required. These delays, and the lack of transparency about their cause and the process for resolving them, can generate considerable uncertainty for taxpayers.

The Board should continue to be an advisory, not a decision-making, body. While it should continue to recognise the government's responsibility for determining policy, it should provide the government with advice about community concerns and priorities for tax policy and legislation.

The Board should not have access to taxpayer information and should not consider the ATO's administrative decisions that relate to specific taxpayers. Nor should the Board audit matters of administrative efficiency or effectiveness, which is a role performed by the Auditor-General.

A focus for the Board should be to examine unintended consequences that arise in the application of tax policy to the varying and complex circumstances of different taxpayers. While a consultative approach to developing policy, law and administration should reduce the incidence of unintended consequences, the complexity of the system makes it inevitable that there will be some. For instance, laws will sometimes be designed or administered in a way that causes unnecessary complexity, uncertainty, compliance costs or inconsistency with the intended policy.

While the Board would not be in a position to direct the government to amend the law, its independent advice would highlight which issues are most important to taxpayers. This would be a valuable input into the government's work program, though it would still need to consider proposals in the context of its overall legislative priorities. The Board would publish its findings and recommendations.

The recommended changes to the nature and focus of the Board would increase the opportunity for taxpayers to voice concerns about the operation of the system. In addition to receiving submissions directly from taxpayers, the Board would be expected to monitor the government's Tax Issues Entry System website (see Recommendation 111). Another source of issues would be those the Board uncovers while reviewing matters referred to it by the government.

It is likely that the community will raise many more issues than the Board can examine, particularly when these are added to the other matters referred to it by the government. In consultation with the community, the Board should develop an annual work program to outline its planned activities for the coming year. While the Board should examine issues that are important to taxpayers, it should focus on areas that are also priorities for the government, so that its advice continues to be relevant and effective.

The government should ensure that the Board is adequately resourced to undertake these additional responsibilities. It might be necessary to appoint further members and/or members who can devote more time to the Board, while ensuring the Board retains its strong links to the business and broader community. The Board should also be resourced to attract and retain a permanent secretariat that can draw from the private and government sectors.

The Board needs to be seen as independent of both the Treasury and the ATO, with its own direct access to the government. The Review of Business Taxation (1999) recommended that the Board be established as a statutory body, though the government of the day decided to establish it as a non-statutory body. Formally establishing the Board by an Act might emphasise its independence, establish a more substantial ongoing status, and make its functions and powers clearer. However, with greater independence comes the risk that the Board might lose some of its ability to work in partnership with the Treasury and the ATO to make constructive suggestions to the government. These are strengths of the current arrangements, which have enabled the Board to have considerable influence. While it is desirable to emphasise the independence of the Board, this should not be at the expense of its relevance and effectiveness. On balance, the Review does not favour establishing the Board as a statutory body.

The Board includes three public sector members — the Secretary to the Treasury, the Commissioner of Taxation, and the First Parliamentary Counsel — though these members are not bound by the Board's recommendations. The government should consider whether these public sector officials should be advisers to the Board, rather than members. This change could reinforce that the Board is independent of the public service, but ensure that the Board is still appropriately connected to the functionary arms of government.

There is some potential for overlap between the Board's expanded role and the review functions currently performed by the Inspector-General of Taxation, the ANAO and the Ombudsman. As one way to ensure that there is no inadvertent duplication of effort, there should be consultation between them. This could be assisted by appointing the Inspector-General, the ANAO and the Ombudsman as advisers to the Board. In addition, appointing the Chair of the newly established Tax Practitioners Board as an adviser to the Board of Taxation could bring a further perspective about the practical operation of the system.

An objective and purposive approach to interpreting tax laws

Taxpayers and practitioners have a legitimate expectation that the advice they receive from the ATO should be accurate and unbiased. Some submissions to the Review have alleged that the ATO's advice is motivated by a pro-revenue bias and that the ATO has inadequate incentive to administer the law consistently with its policy intent. The Inspector-General and the JCPAA have found no objective evidence to support this claim. Further, according to surveys, the ATO's private rulings for large business received a 95 per cent satisfaction rating, with another 2.5 per cent neither satisfied nor dissatisfied. Of the rest, 2 per cent were dissatisfied, and 0.5 per cent very dissatisfied. The ATO's class rulings to large businesses received similarly high ratings, with 91 per cent of respondents satisfied and 9 per cent neither satisfied nor dissatisfied. Nevertheless, some have suggested that the ATO's ruling and revenue-collection roles should be separated.

In Sweden, private binding rulings are given by a body independent of the revenue-collection agency (OECD 2008). This separation differentiates tax collection and legal interpretation and attempts to introduce greater independence in the interpretation of the law. This arrangement came about as a result of criticisms that the revenue collector was not objective and independent. A difficulty with the Swedish system is the delays that applicants experience in receiving ruling decisions, of which there are relatively few (IGT 2008). If a similar system were implemented in Australia, this problem might be overcome with adequate resourcing of the rulings body. The government could redirect some of the ATO's current budget to fund the new agency. If needed, this could be supplemented by charging application fees for more complex rulings.

Of greater concern than potential delays would be the risk that an independent rulings body might reduce the flexibility and responsiveness taxpayers want from the ATO. An independent rulings body would be detached from the practical consequences of its interpretations (because it would not be responsible for either changing the law or for implementing it), and there is the prospect that it would take an overly legalistic approach. While the ATO is sometimes criticised for applying tax laws too literally, it often exercises discretion to help taxpayers comply. Arguably, a more independent body may have less of an appreciation of the impacts of its decisions. To some extent, these institutional incentives could be corrected by having the right governance and accountability arrangements in place. In particular, the rulings body could be established under a charter that sets out an expectation that it should promote voluntary compliance.

While the rulings function could be moved to an independent body, the ATO would still have to interpret the law in order to fulfil its administrative role. In the absence of the ATO's 'in-house' binding rulings regime, taxpayers would have a reduced understanding of the ATO's view of the law and a reduced capacity to bind the ATO to those of its views that were known. Even if the independent body had issued a ruling that bound the ATO, there could be doubt about the ATO's view on whether or not it applied in a given case.

Rather than creating a separate institution to issue tax rulings, the Review Panel considers that the ATO should continue to execute that role in a way that builds community trust in the fairness of its approach. The ATO should continue to bring a practical administrative perspective to the purposive interpretation of tax laws. Greater transparency about the policy objective of the tax laws will support a purposive approach to interpretation. A principles-based design of the law will help make the policy objectives more explicit (see Recommendation 112). Transparency would also be enhanced by publishing information or advice provided by Treasury to assist the ATO in determining the purpose or object of the law, or materials used by the ATO to determine policy intent (see Recommendation 114).