Australia's Future Tax System

Architecture of Australia's tax and transfer system

11.1 Introduction

In 1975, the report of the Taxation Review Committee (Asprey et al, 1975) noted with some alarm that the income tax law extended to 526 pages, six times its original length in 1936. The income tax law is now 5,743 pages.

The complexity of the tax‑transfer system and the level of compliance costs1 borne by taxpayers and transfer recipients remain issues of considerable concern. Excessive levels of complexity impede the ability of taxpayers and recipients to make optimal decisions. The time and resources individuals devote to complying with the requirements of the law could be allocated to more productive or satisfying activities and therefore represent a significant efficiency cost to the economy. Complexity in the tax‑transfer system can also give rise to tax planning opportunities that add to the efficiency costs of the system and reduce its fairness by shifting the tax burden from one individual to another. See Box 11.1 for further discussion about the problem of complexity.

To a significant extent, the complexity of the tax‑transfer system and its operating costs (administration and compliance costs) arise from the underlying policy and legislation that defines the system. However, the administrative architecture and the way agencies implement the underlying policy and legislation can greatly influence the complexity that taxpayers and transfer recipients experience and the extent of their compliance costs.

Notwithstanding the concerns expressed about the complexity of the tax‑transfer system and the associated compliance costs, taxpayers and transfer recipients behave in ways that contribute to the problem by seeking special treatment or seeking to maximise their incomes (after taking into account taxes and transfers).

Box 11.1: Why complexity is a problem

Complexity in the tax‑transfer system makes it harder for people to understand their obligations and entitlements. Unless they get professional advice, people may rely on simplistic rules of thumb for making judgments, such as following 'tried and tested' practices without considering whether these arrangements give the best outcomes.

Importantly, complexity tends to have the greatest impact on those with the least capacity to deal with it, or the least means to get professional help. For example, it is generally accepted that the impact of complexity falls disproportionately upon smaller businesses. For these businesses and many individuals, an overly complex system can increase the risk of non‑compliance and may impede good decision making.

Individuals may incur additional costs (time and money) dealing with the uncertainty complexity creates. Some individuals may conduct their affairs to minimise the complexity they have to deal with — for example, by avoiding activities involving greater uncertainty or risk of being penalised — even if it means they pay more tax than necessary or do not claim benefits to which they are entitled. Those with greater financial capacity may deal with complexity by engaging professional help.

System complexity may also create unintended opportunities for taxpayers and transfer recipients to maximise their disposable income (income less taxes plus transfers). This behaviour effectively increases the tax burden on others, which can undermine the fairness of the tax‑transfer system. It can also have a broader impact on community support for the system and levels of voluntary compliance. Economic efficiency is also compromised through the diversion of resources from more productive pursuits into these planning activities.

1 Compliance costs include, but are not limited to, the costs of: acquiring the necessary knowledge of relevant aspects of the tax-transfer system; compiling records; completing forms and reporting changes in circumstances; acquiring and maintaining record keeping systems; complying with audits or attending interviews; evaluating the effectiveness of alternative transactions or alternative methods of complying with the requirements of the law; and collecting and remitting taxes levied on employees and turnover.