Austaxpolicy: The Tax and Transfer Policy Blog https://www.austaxpolicy.com Research and analysis of tax and transfer policy for public benefit Fri, 26 Feb 2021 23:51:55 +0000 en-AU hourly 1 https://wordpress.org/?v=5.6 The $50 Boost to JobSeeker Will Take Australia’s Payment From the Lowest in the OECD to the Second-Lowest After Greece https://www.austaxpolicy.com/the-50-boost-to-jobseeker-will-take-australias-payment-from-the-lowest-in-the-oecd-to-the-second-lowest-after-greece/?utm_source=rss&utm_medium=rss&utm_campaign=the-50-boost-to-jobseeker-will-take-australias-payment-from-the-lowest-in-the-oecd-to-the-second-lowest-after-greece https://www.austaxpolicy.com/the-50-boost-to-jobseeker-will-take-australias-payment-from-the-lowest-in-the-oecd-to-the-second-lowest-after-greece/#respond Wed, 24 Feb 2021 22:51:05 +0000 https://www.austaxpolicy.com/?p=79469 Fifty dollars sounds like a lot. But the increase in the JobSeeker unemployment benefit announced by Prime Minister Morrison on Tuesday is $50 per fortnight,… Read More ›

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Fifty dollars sounds like a lot. But the increase in the JobSeeker unemployment benefit announced by Prime Minister Morrison on Tuesday is $50 per fortnight, which is just $25 per week. It will replace the temporary Coronavirus Supplement of $75 per week, which is itself well down on the $275 per week it began at in March last year.

It’s hard to see the increase as anything other than a cut, especially when coupled with another change which will allow recipients to earn other income of only $75 per week before JobSeeker gets cut. That’s down from the present $150 per week.

As the prime minister said, it’s better than it would have been if things returned to the level we had before special coronavirus provisions. At that time, recipients could earn only $53 per week before having their payment reduced.

But it’s not particularly generous. The Age and Sydney Morning Herald are quoting senior government sources as saying the $50 per fortnight increase in the rate was the lowest figure the party believed would be palatable to the public.

Morrison justified the increase of $50 per fortnight – rather than $150 (which would have kept what’s left of the coronavirus boost in place) or $100 or any other figure – by saying it will bring the payment to

41.2% of the national minimum wage, which puts us back in the realm of where we had been previously

Taking account of taxes paid and superannuation received by minimum wage workers gives a slightly higher replacement rate of 42.3%. That takes it back to roughly where it was at the end of the Howard government in 2007.

However, there’s no readily apparent reason why that should be a benchmark.

During the life of the Howard government the level of the single payment fell from around 50% of the minimum wage to 42%, meaning what’s proposed will return it to its lowest point relative to other benefits under Howard.


JobSeeker and age pension as a proportion of the minimum wage 1990-2021

Notes: Rates for single adult shown relative to net income when receiving a full-time minimum wage (deducting tax and Medicare levy, and adding employer superannuation contribution). Any casual loading not included. Rates shown at first of each month. Any rent assistance not included. Poverty line is half of median equivalised household income for non self-employed workers. Rates include coronavirus supplement and energy supplement, future rates are estimates.

 

Morrison also said the increase was the largest permanent increase in the unemployment benefit since 1986. It’s an increase of 9.7%.

During the Hawke and Keating administrations, the payment increased 23% in real terms. During the Whitlam administration it increased 50%. This means that while what’s offered is substantial by the standards of recent decades, it’s less so in the longer run.

But what about the supplements?

Morrison also argued in his press conference JobSeeker is more adequate than the base rate would suggest because

on top of that, if they’re receiving Commonwealth Rent Assistance, that payment would increase to $760.40; and on top of that, the average value of stand-alone supplements, the energy supplement and so on, is an additional $13.03. So the suggestion that anyone who was on JobSeeker is simply on that payment alone and there aren’t additional supports that are provided is not correct.

It’s true all people on income support receive the energy supplement (included in the figure above). But for a single person on JobSeeker, the supplement is only $8.80 per fortnight or less than 65 cents a day.

Many people do indeed get rent assistance, but after paying rent they become worse off rather than better off.

That’s because to get the maximum rate of rent assistance for a single person of $140 per fortnight (9% of the minimum wage), that person has to be paying around $310 per fortnight in rent. If that person is paying more, they get no extra help. The maximum is also lower for people in shared accommodation.

Private sector renters are amongst the worst off recipients of income support.

Other supplements such as the remote area allowance are indeed available, but are of no help to people who do not live in remote areas and may be inadequate to cover the higher costs involved. Supplements for help with language and literacy are only paid to people in special educational programmes.

Producing an average that includes supplementary payments most people don’t receive is inherently misleading.

How Australia compares

Net replacement rates measure the proportion of previous in-work income that is maintained after several months of unemployment. They are the benchmark used by the the prime minister to compare benefits to the minimum wage.

Using two months in unemployment as the measuring point (and using the most recently published 2019 rankings) before the pandemic, Australia’s replacement rate was the lowest in the OECD — even after rental assistance was added in.


Unemployment benefit, share of previous income after two months

Net replacement rates in unemployment including rent assistance, 2019 or latest available data.
OECD.Stat

 

When the maximum rate of Coronavirus Supplement was briefly in force in 2020, Australia moved to around the OECD average.

The new rate from April 2021 will move Australia from the lowest to the second lowest, ahead of Greece only.


Unemployment benefit, share of previous income, after Australian increase

Net replacement rates in unemployment including rent assistance after two months, 2019 or latest available data.
OECD.Stat

 

It should be acknowledged Australia’s system is based on different principles to many other OECD countries in which workers and their employers make contributions to and withdrawals from unemployment insurance.

But the difference in philosophy does not change the brutal reality that when Australian workers lose their job, their incomes fall more than in almost any other high income country.

Even after what the government has trumpeted as a historic increase, there will be few developed countries where people will be as worse off after losing work. Any permanent increase is welcome, but there is a long way to go.The Conversation

 

This article is republished from The Conversation under a Creative Commons license. Read the original article.

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Has COVID-19 Opened the Door to an Australian Basic Income? https://www.austaxpolicy.com/has-covid-19-opened-the-door-to-an-australian-basic-income/?utm_source=rss&utm_medium=rss&utm_campaign=has-covid-19-opened-the-door-to-an-australian-basic-income https://www.austaxpolicy.com/has-covid-19-opened-the-door-to-an-australian-basic-income/#respond Sun, 21 Feb 2021 21:10:33 +0000 https://www.austaxpolicy.com/?p=79422 For a brief period when the JobSeeker unemployment benefit was increased to $550 per week and conditionality was relaxed, Australians had access to a type… Read More ›

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For a brief period when the JobSeeker unemployment benefit was increased to $550 per week and conditionality was relaxed, Australians had access to a type of Basic Income.

The results were impressive. Billions in macroeconomic stimulus and hundreds of thousands of Australians kept out of poverty.

Recent research has documented the impact of the boosted JobSeeker payment on income poverty levels and the lived experience of welfare recipients.

Scenario modelling by Phillips, Gray and Biddle (2020) found that individuals receiving ‘Newstart/Youth Allowance are estimated to have experienced the largest reduction in household poverty gaps, from a pre-COVID average of $6,201 per year to just $241 per year’ with poverty rates plunging from 67 per cent to 7 per cent for this cohort.

But this unplanned experiment is drawing to a close. Conditionality has been reinstated and the payment rate progressively reduced in step with the Federal Government’s stated intention to end the Coronavirus supplement in March.

Spies-Butcher has pointed to the irony of being able to ‘somehow…lift thousands out of poverty’ at the height of the pandemic while ‘as the economy grows and prosperity is restored, so too is poverty’.

But the pandemic has clearly shown that governments and societies have choices when it comes to social protection.

Basic Income

One option that has gained currency in policy circles and public debate in recent years is Basic Income (BI) or Universal Basic Income (UBI).

The Basic Income Earth Network defines Basic Income as ‘a periodic cash payment unconditionally delivered to all on an individual basis, without means-test or work requirement’. But the idea also encompasses a negative income tax where payments are only made to individuals below a specified income threshold.

A recent YouGov survey of Australian attitudes found that 58 per cent of respondents would support ‘a Guaranteed Living Wage or a Universal Basic Income’ with 19 per cent opposed. And 50 per cent agreed ‘we should provide unconditional income support to those out of work’ compared to 25 per cent opposed.

These results offer some encouragement to those interested in more universal and less conditional forms of social protection as a policy option for Australia.

We contributed to this evolving debate in ‘Between universalism and targeting: Exploring policy pathways for an Australian Basic Income’ published in the Economic and Labour Relations Review (full text available here).

Our research

Our first aim was to enumerate a set of principles that would underpin a model of Basic Income that is sensitive to the institutional logics of the Australian welfare state. Second, we modelled the fiscal and distributional impacts of an Australian Basic Income, highlighting particular policy tradeoffs in such a shift.

Our model is structured around the principle of ‘affluence testing’ in which ‘income-testing is primarily used to limit access by the better off’, rather than targeting payments only to the poor. In practice this means reducing taper rates, making more people eligible for part-payments.

We suggest this approach would move the Australian social transfer system in a more universal direction while containing the fiscal cost—and associated fiscal churn—of a UBI-style payment that would pay all adults the same Basic Income amount. Affluence testing encompasses a focus on both equity and efficiency.

Next we specified four subsidiary principles that reflect the logic of integrating tax and welfare systems via effective marginal tax rates (EMTRs) and acknowledge existing institutional arrangements as the starting point for reform. These are:

  1. EMTRs should only increase with income (progressivity of incentives);
  2. High-income earners should receive no net benefit from moves towards universalism (fiscal efficiency);
  3. No below median income earner should be left worse off (in other words, have a lower net income for any given market income) (equity);
  4. The current tax scale should be largely taken as given (path dependency).

Based on these principles we modelled two Basic Income scenarios for Australia based on pre-COVID payment levels. Model 1 has a base rate of the Newstart unemployment benefit ($14,647.32 per annum). Model 2 has a base rate of Newstart plus $75 per week ($18,252.98 per annum) in line with pre-COVID stakeholder campaigns to ‘Raise the Rate’.

Adults age 18 until pension age would be eligible for the Basic Income payment without being subjected to asset tests or work activity testing. The base rate is gradually tapered as market incomes increase (See Tables 1 and 2).

Table 1: Affluence-tested Basic Income payment Model 1, Newstart.

Table 2: Affluence-tested Basic Income payment Model 2, Newstart + $75pw.

Individuals receiving a higher payment, such as the Disability Support Pension, would remain on their existing benefit in line with much international Basic Income literature. The retirement incomes system is left unchanged.

The fiscal and distributional impacts of both payment levels are estimated using the ANU’s PolicyMod model of Australia’s tax and transfer system.

Findings

In terms of fiscal impact, the estimated annual net cost of Model 1 is $103.45 billion, and the annual net cost for the more generous Model 2 is $126.1 billion. While clearly significant sums, meeting the additional cost would only require an increase in Australia’s tax-to-GDP ratio (currently 27.8 per cent across all levels of government) to around the OECD average of 34.2 percent.

To achieve fiscal neutrality, all marginal income tax rates would need to be increased by 12 percentage points for Model 1 and by 14.5 percentage points for Model 2. We use individual income tax rates for illustrative purposes only and acknowledge that an alternative tax mix may have different fiscal and distributional implications.

Turning to static distributional effects, both Model 1 and Model 2 deliver significant income gains to middle income earners and reduce inequality and poverty rates (see Tables 3 and 4). Inequality is reduced by 50 to 65 Gini points while poverty rates fall by between 17 per cent and 22 per cent. This would see Australian income inequality fall from 0.337 to 0.274, similar to Scandinavian levels (between Sweden’s 0.282 and Denmark’s 0.263).

Table 3: Distributional impacts of affluence-tested Basic Income proposals. Percentage change in annual equivalised disposable income, (change in dollars).

Table 4: Fiscal and distributional impacts of Basic Income models.

Policy takeaways

We conclude with three main observations regarding this study.

First, our results are consistent with previous research indicating that any reasonable Basic Income payment is likely to have a large fiscal impact, even when incorporating elements of a negative income tax model. However, the model we present is less costly than what might be expected from other recent analysis.

Second, an affluence-tested model of Basic Income appears consistent with the redistributive logic of the current tax and welfare system.

Third, our models help to situate medium- to long-term political choices in framing trade-offs between levels of taxation and inequality.

Finally, we reflect on the relationship between payments, inequality and work. We suggest that moves towards universalism are likely to significantly benefit those on the margins of the labour market and is also is likely to substantially benefit middle-income workers. In sum, affluence testing implies a partial buffer to the loss of income at the margin, while reducing taper rates would improve work incentives for many low-income workers.

We acknowledge that a reform on this scale may not be considered a near-term policy option. At the same time, the COVID-19 policy interventions have opened up the policy space for a more detailed consideration of innovative reform in the sphere of social protection.

We suggest, therefore, that an affluence tested Australian Basic Income represents a realistic medium-term political choice, which might be gradually realised by advancing the relaxation of benefit withdrawal rates over tax cuts, and individualising payments over time.

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GST: Where to Next? https://www.austaxpolicy.com/gst-where-to-next/?utm_source=rss&utm_medium=rss&utm_campaign=gst-where-to-next https://www.austaxpolicy.com/gst-where-to-next/#comments Mon, 15 Feb 2021 22:50:17 +0000 https://www.austaxpolicy.com/?p=79391 Historically, household consumption has been relatively stable as a proportion of gross domestic product (GDP). For over 50 years, tax reform reviews in Australia have… Read More ›

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Historically, household consumption has been relatively stable as a proportion of gross domestic product (GDP). For over 50 years, tax reform reviews in Australia have accepted that the revenue from a tax on consumption expenditure would grow in line with the broader economy.

Consistent with that prevailing view, the 1998 A New Tax System White Paper proposed a value-added tax for Australia. The so-called goods and services tax (GST) commenced on 1 July 2000.

The objectives of the GST set out in the White Paper were to:

  • secure and grow a source of revenue for the States and Territories;
  • remove the reliance of the States on Commonwealth grants and distorting taxes; and
  • ensure that ‘the erosion of indirect tax revenue is halted permanently’.

My review of the GST’s performance published in UNSW Business School’s eJournal of Tax Research concludes that the existing GST system is unlikely to satisfy the objectives set for it in the White Paper. It suggests that the growth and stability of GST revenues is unlikely to be achieved by merely broadening the base and/or increasing the rate due to the reasons discussed below which include:

  • the areas in which the GST base can be expanded do not grow in proportion to increases in GDP. Consequently, if the base from which GST can be collected is a diminishing proportion of GDP, the rate of GST would have to be indexed regularly to maintain GST’s proportion of GDP;
  • Increases in savings diminish consumption and hence GST revenues;
  • Losses from GST non-compliance are an increasing proportion of collectable GST.

Subsequent to undertaking my review, the negative effects of COVID-19 on the economic environment and forecasts have been significant.

My recommendations from the review relating to the GST’s policy gaps are summarised hereunder. But further administrative and tax integrity reforms will be necessary to address GST’s diminishing proportion of GDP.

GST today

The 2020-21 Budget statement of revenues and GDP for 2019-20 are:

  • total GST revenues – $60,263 million;
  • GST revenue as a percentage of total Commonwealth tax revenue – 13.96 per cent;
  • GST revenue as a percentage of GDP – 3.04 per cent.

The 2020-21 Budget forward estimates show that GST revenues as a percentage of GDP were at a record low in 2019-20 of 3 per cent and will grow to only 3.35 per cent by 2023-24.

The data of the OECD indicates that, in the 2017-18 fiscal year, GST/VAT as a proportion of GDP in Australia was 3.3 per cent as compared with an OECD average of 6.8 per cent.

Sustainability of GST revenues

Recent publications of the Parliamentary Budget Office, Trends affecting the sustainability of Commonwealth taxes (2018) and Structural Trends in GST (2020), foreshadowed decreasing GST revenues (as a proportion of GDP) and concluded that the reduction is likely to continue.

The 2018 report writes that:

When the GST was introduced, GST receipts were 3.4 per cent of GDP. GST revenue peaked shortly after, in 2003-04, at 3.8 per cent of GDP, reflecting the maturing of the new tax. Since then, GST receipts have declined as a share of GDP to 3.4 per cent in 2016-17…

… [T]here is a likelihood that taxes on consumption will continue to trend downwards … If these risks to tax receipts eventuate, and in the absence of other taxation reforms, maintaining Commonwealth Government revenue at recent levels as a share of GDP will lead to an increasing reliance on taxes on labour income through the personal income tax system.

The 2018 and 2020 PBO Reports identify the trends contributing to the decline in GST revenues.

  1. Since the GST was introduced the proportion of household spending on goods and services that are input taxed or GST-free has increased.
  2. The prices of goods and services that are not subject to the GST have increased faster than those goods and services subject to the GST (consider prices of televisions (subject to the GST) versus health and education (which are GST-free)).
  3. The rampant consumption in the early 2000’s was replaced by higher household savings during the global financial crisis.
  4. The increase in participation in the economy by individual or small operators who may fall under the GST registration threshold.
  5. Household rent (actual or imputed) is the single largest component of household consumption and has increased faster than GDP over recent decades. But GST is not payable on household rent (it is payable on investment in new dwellings) resulting in GST revenue decreasing as a proportion of GDP.

Estimates of the revenue forgone as a result of the under taxation of the ideal base – referred to as policy gaps – are quantified in Australian Treasury’s Annual Tax Benchmarks and Variations Statements.

Bridging the policy gaps

The Tax Benchmarks and Variations Statement 2020 estimates the total GST tax expenditures for the 2020-21 year as $28.9 billion. The top 5 categories account for $27.643 billion.

  • GST-free food – $7.9 billion;
  • GST-free health services, insurance, care, drugs and appliances – $7.19 billion;
  • GST-free education – $5.05 billion;
  • Input taxation of, and reduced input tax credits (RITC) for financial services – $4.55 billion;
  • GST-free child care – $1.45 billion;

Having considered each of these expenditures, my review concludes that food and financial services should be fully taxed.

These reforms would, on the basis of the Tax Benchmarks and Variations Statement 2020 numbers, raise an additional $12.45 billion in GST. On the basis of the 2020-21 budget forecasts, the reversal of these expenditures would increase GST to approximately 3.72 per cent of GDP in 2020-21.

In addition to the full taxation of food and financial services, if the GST rate were increased to 18 per cent, on the basis of the 2020-21 estimates, GST revenues would grow to 6.7 per cent of GDP – closer to the OECD average.

But, if the trends identified in the 2018 and 2020 PBO Reports continue as predicted, addressing these larger policy gaps and an increase in the rate would not leave us with a secure revenue source for the States and Territories that is likely to grow with GDP. The trends that act against GST revenues growing with GDP are:

  • The prices of goods and services that are not subject to the GST are increasing faster than those goods and services subject to the GST;
  • The proportion of household spending on goods and services that are GST-free continues to increase;
  • In periods during which household savings increase, household consumption (and consequently GST) decreases;
  • GST collected through input taxation of residential dwellings does not grow at the same rate as the GST collected on investment in new dwellings;
  • The increasing GST revenue losses from non-compliance (called ‘compliance gaps’).

Bridging the compliance gaps

Non-compliance is an equally significant challenge confronting VAT/GST revenue authorities. The Australian Taxation Office (ATO) has estimated that the GST compliance gap in 2018-19 was 8.1 per cent or about $5.8 billion.

In addition to considering policy gaps, my review also considers increases in the GST rate, integrity measures and the value-added tax design itself to assess the implication for GST’s future as the dominant source of State and Territory revenue.

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The Taxation of Capital Gains in Trusts after Bamford: A Critical Evaluation of Subdivision 115-C ITAA97 https://www.austaxpolicy.com/the-taxation-of-capital-gains-in-trusts-after-bamford-a-critical-evaluation-of-subdivision-115-c-itaa97/?utm_source=rss&utm_medium=rss&utm_campaign=the-taxation-of-capital-gains-in-trusts-after-bamford-a-critical-evaluation-of-subdivision-115-c-itaa97 https://www.austaxpolicy.com/the-taxation-of-capital-gains-in-trusts-after-bamford-a-critical-evaluation-of-subdivision-115-c-itaa97/#respond Wed, 10 Feb 2021 21:41:03 +0000 https://www.austaxpolicy.com/?p=79251 In Australia, trusts (particularly discretionary trusts) are often used to achieve tax optimal outcomes for beneficiaries. Attempts to engage in ‘income splitting’ within families are… Read More ›

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In Australia, trusts (particularly discretionary trusts) are often used to achieve tax optimal outcomes for beneficiaries. Attempts to engage in ‘income splitting’ within families are an obvious example. Some categories of income have specific tax consequences and as a result, trustees have incentives to make allocations of income to beneficiaries in ways that are considered advantageous for tax purposes. This is so with capital gains. My recent paper critically evaluates the complex regime which governs the taxation of capital gains in trusts, Subdivision 115-C of the Income Tax Assessment Act 1997 (ITAA97). This regime was enacted in 2011 as an ‘interim’ change aimed to improve the taxation of trust income, according to the explanatory memorandum. There has been no review or further reform a decade later.

In a trust setting, the notion of ‘streaming’ capital gains refers to the ability to allocate capital gains among beneficiaries in whatever ways that are considered optimal, which could be quite different to the basis for distributing other trust income. For example, a trustee may wish to allocate a trust capital gain entirely to a beneficiary who has a personal capital loss (rather than another beneficiary without a capital loss), so that the beneficiary can use the loss to reduce the taxable capital gain.

I argue that Subdivision 115-C is unnecessarily complex, and propose simpler processes that enable streaming. I also ask whether the regime meets the longstanding policy objective of ensuring a reasonable nexus between beneficiaries’ distributable and taxable income and highlight an anomaly in the regime.

Background to Subdivision 115C

Before 2011, the scheme for the taxation of trusts including capital gains was in Division 6, Part III of the Income Tax Assessment Act 1936 (ITAA36). The main purpose of Subdivision 115-C was to ensure that the streaming of capital gains to specific beneficiaries would be effective for tax purposes.

Subdivision 115-C was enacted because the Government assumed that the ‘proportionate approach,’ confirmed by the High Court in Commissioner of Taxation v Bamford (2010) (‘Bamford’) precluded streaming. In Bamford, the High Court confirmed that a beneficiary’s assessable income under income tax law (section 97 ITAA36) is determined by applying their percentage share of trust distributable income to the trust’s taxable income, this being the so-called ‘proportionate approach.’

An example

The assumed operation of Bamford and the effect of Subdivision 115-C are illustrated in the following example.

The A Family Trust has rental income of $100,000 and a (non-discountable) capital gain of $50,000. The trustee exercises a power under the trust deed to treat capital gains as income (although capital gains are not part of trust income under general law principles, the High Court confirmed the legal efficacy of such provisions in Bamford). Therefore, distributable and taxable trust income is $150,000.

 

The legal capability to stream capital gains matters to trustees if the individual tax circumstances of a beneficiary mean that allocation of the capital gain to them confers a tax advantage.

Suppose A has a personal capital loss exceeding $50,000 and for this reason, the trustee purports to allocate the capital gain wholly to A, with the rental income being allocated wholly to B.

Before 2011, because A’s share of distributable income is $50,000 (the $50,000 capital gain) or one-third ($50,000/$150,000), A’s share of trust taxable income ($150,000) must also be one-third (33.3%). In other words, $50,000. On the Government’s interpretation of the pre-2011 law, no effect can be given to the trustee’s intention to allocate 100% of the capital gain to A, because it assumed that under Bamford, the proportionate approach requires that A’s one-third allocation of trust taxable income correspond to the same proportionate shares of each component of trust taxable income, in other words, one-third of the rent and one-third of the capital gain. It was assumed A’s share of trust taxable income of $50,000 comprises rental income of $33,333 (33.3% x $100,000 rent) and a capital gain of $16,667 (33.3% x $50,000 capital gain). This is the assumption upon which the 2011 amendments proceed. The trustee’s intention to stream the $50,000 capital gain to A is frustrated.

This outcome is not inevitable at least in cases such as this where trust distributable income equals trust taxable income. In this case, it is possible to give effect to the proportionate approach that a beneficiary’s proportionate share of distributable income (one-third) matches their proportionate share of taxable income (one-third) while giving effect to streaming intentions. It could be held that A’s one-third share of trust taxable income comprises the $50,000 capital gain as intended.

But where trust taxable income differs from distributable income, it is not possible to both give effect to the proportionate approach and streaming intentions – one must trump the other.

Subdivision 115-C ITAA97 enables the streaming of capital gains through the mechanism of creating ‘specific entitlements’. A beneficiary is ‘specifically entitled’ to a capital gain when they have received or are expected to receive a net financial benefit attributable to a capital gain. Specific entitlement is similar to the notion of ‘present entitlement’ for general tax law allocation of trust income. This rule would give effect to the intention of the trustee to allocate the whole capital gain to A for tax purposes.

Here, as A is entitled to 100% of the net financial benefit attributable to the $50,000 capital gain, their specific entitlement amount is $50,000, which would also be their taxable capital gain. The effect of Subdivision 115-C is to allocate the entire taxable capital gain to A, consistent with the trustee’s streaming intentions.

Under Subdivision 115-C, if there are no specific entitlements (in other words, no streaming intention), there is a default allocation based on present entitlement to distributable income. This is based on an ‘adjusted Division 6 percentage,’ which operates in a manner that is similar to the pre-2011 proportionate approach. Otherwise, the trustee’s streaming intentions take priority over the pre-2011 proportionate approach.

The benefits and disadvantages of the 2011 reform

The major practical benefit of the regime in Subdivision 115-C is that it enables the streaming of capital gains to beneficiaries, as shown in the example above.

There is also a definite advantage compared to the pre-2011 law where capital gains are not included as part of trust distributable income. Somewhat counter-intuitively, the legislation still enables the trustee to invoke the specific entitlement mechanism to allocate capital gains among beneficiaries in a tax effective way in this situation, provided the trustee has the power to stream capital gains under the trust deed. This prevents application of the higher rates of tax under section 99A ITAA36 (the highest marginal rate of tax applied as a flat rate) where the trust’s only taxable gain is a net capital gain. Under the pre-2011 law, section 99A rates would apply as there would necessarily be no income to which a beneficiary could be presently entitled for the purpose of section 97 ITAA36 (which relies on general law notions of income).

The main disadvantage of the regime is its immense and unnecessary complexity. For example, even where there is no streaming, the regime requires a full analysis through the statutory lens of specific entitlement when there are no specific entitlements at all, with the adjusted Division 6 percentage being used to produce the same results as the pre-2011 proportionate approach.

The most problematic aspect of the regime arises in the context of partial streaming where both the specific entitlement and adjusted Division 6 percentage concepts must be utilised. There are five distinct steps to work out taxable capital gains, and the complexity arises not only because of the number of steps but also because the individual steps are very complicated.

In particular, there is an anomaly in the setting of partial streaming where capital gains are not included in trust income because the allocation that results is not at all based on the parties’ economic entitlements. This is because the capital gain not referable to specific entitlement is allocated for tax purposes based on entitlements to trust distributable income excluding streamed capital gains, but this does not take account of the fact that streaming has changed the economic entitlements of the parties.

My paper shows how streaming can be achieved in a simpler way, using fewer steps, where taxable capital gains exactly match beneficiaries’ economic entitlements whereas this is not consistently achieved under the legislation.

A review and reform is needed

The ‘interim’ reform of 2011 which enacted Subdivision 115-C ITAA97 achieves the legislative purpose of enabling streaming. But the regime is unnecessarily complex and there is at least one anomaly which creates inequity in the division of the tax burden among beneficiaries.

Subdivision 115-C ought to be reviewed with a view to addressing these deficiencies. Streaming of capital gains can be achieved through the use of simpler processes that achieve a closer match between tax liabilities and economic entitlements.

Note: Results may vary about any product effectiveness. vgrmalaysia.net The information contained in this website is provided for general informational purposes only.

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Overturning an Assessment Where the ATO Merely Suspects Fraud or Evasion https://www.austaxpolicy.com/overturning-an-assessment-where-the-ato-merely-suspects-fraud-or-evasion/?utm_source=rss&utm_medium=rss&utm_campaign=overturning-an-assessment-where-the-ato-merely-suspects-fraud-or-evasion https://www.austaxpolicy.com/overturning-an-assessment-where-the-ato-merely-suspects-fraud-or-evasion/#comments Sun, 07 Feb 2021 22:18:41 +0000 https://www.austaxpolicy.com/?p=79334 Every person must, if required by the Commissioner of Taxation, lodge an annual return for income tax purposes. Once lodged, the Commissioner must make an… Read More ›

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Every person must, if required by the Commissioner of Taxation, lodge an annual return for income tax purposes. Once lodged, the Commissioner must make an assessment of the taxable income and tax payable based on information in the return and ‘any other information in the Commissioner’s possession’. This is irrespective of whether the information was illegally disclosed or privileged.

The Commissioner (or taxpayer) usually has two years to amend an assessment (4 years in the case of more complex affairs). However, if the Commissioner is of the opinion there has been fraud or evasion, an assessment may be amended ‘at any time’. Rightly, this ensures a taxpayer who engages in calculated behaviour to evade tax should remain permanently at risk. This will be the case where non-disclosure of an assessable amount is due to some blameworthy or unlawful conduct on the part of the taxpayer.

Evidence of inappropriate practice

In 2015, the Standing Committee on Tax and Revenue responded to growing evidence that Australian Tax Office (ATO) officers ‘sometimes allege fraud or evasion without turning their mind to the question of whether fraud or evasion actually exists’. The Committee recommended that the ‘burden of proof switch back to the ATO once the statutory record-keeping period for taxpayers has expired.’ This recommendation was promptly rejected by the Government on the basis that it would be counterproductive and encourage sham behaviour by taxpayers associated with fraud and evasion.

What the Government fails to acknowledge is that unsubstantiated allegations of fraud or evasion and the uncertainty this generates reduce taxpayer confidence in the system. This is particularly significant as the system was updated in 2004 to promote taxpayer confidence and reduce uncertainty by giving earlier finality to taxpayers who have tried to comply by shortening the period in which their assessment can be amended to increase their liability.

Judicial review

I argue that there is no need for legislative reform to reverse the onus of proof. The courts already have original jurisdiction to ensure the Commissioner always acts within the limits of his assessment-making power, including the obligation to act reasonably and not arbitrarily when making an assessment. This jurisdiction is in addition to the usual statutory process for reviewing assessments which is discussed below.

Whether it is rationally open for the Commissioner to infer fraud or evasion is ultimately a question for judicial decision arising within the original jurisdiction of courts. The Federal Court of Australia is vested with the same original jurisdiction as that conferred on the High Court of Australia, under section 75(v) of the Constitution. This is an entrenched minimum provision of judicial review authorising the High Court (and, by implication, the Federal Court) to grant discretionary relief of mandamus, certiorari and/or prohibition to vitiate an assessment made beyond power. This will be the case where the assessment-making process is tainted by jurisdictional error, which arises where:

an administrative tribunal falls into an error of law which causes it to identify a wrong issue, to ask itself a wrong question, to ignore relevant material, to rely on irrelevant material or, at least in some circumstances, to make an erroneous finding or to reach a mistaken conclusion….

What the court does in judicial review is to inquire whether the Commissioner’s opinion about fraud or evasion has really been formed. It will not in fact be formed unless there is evidence upon which the Commissioner could reasonably draw the requisite inference. To this end, it is a fundamental constitutional principle that the Commissioner cannot merely act arbitrarily or capriciously.

The statutory process for invalidating an assessment

A dissatisfied taxpayer can, in the normal course, seek to invalidate an assessment by establishing that the amount of tax assessed is excessive. The taxpayer can do so by producing documents affirmatively showing either that an undisclosed amount on which additional tax is computed is not assessable or that the taxpayer otherwise made full and true disclosure.

It may be particularly difficult for the taxpayer to discharge this burden of proof where the assessment relates to a period falling outside the 5-year statutory period for retaining documents. Without documentary evidence establishing the non-assessability of an amount on which additional tax is computed, it would be futile to allege the Commissioner could not have formed the requisite opinion because there was no evidence of calculated behaviour.

In Nguyen, the Administrative Appeals Tribunal confirmed assessments amended by the Commissioner (outside the 2-year period) after discovery of unexplained cash of around $2 million presented by the taxpayer at casinos. The taxpayer, who worked as a nail technician, contended, inter alia, that mere withholding of information does not amount to blameworthy conduct and that ‘the Commissioner failed to establish there was a business that would generate a realistic income’. At [34], Senior Member O’Loughlin said:

Provided the Commissioner has formed the requisite opinion … may well be to make a fraud or evasion finding unchallengeable independently of the challenge to the assessability of the relevant amount.

In the statutory process, the taxpayer has no scope to allege that formation of the Commissioner’s opinion was unreasonable, and unauthorised, for want of probative evidence establishing fraud or evasion. This is because such an allegation relates to the due making of the assessment, which is deemed to have been properly made by virtue of section 350-10 of the Taxation Administration Act 1953. This provision gives evidentiary effect to section 175 of the Income Tax Assessment Act 1936, which provides ‘the validity of any assessment shall not be affected by reason that any provisions of this Act have not been complied with.’

When does an assessment not answer the statutory description of ‘assessment’?

According to the Full Federal Court in Chhua, an allegation there was no evidence to sustain formation of the requisite opinion can only be overturned in the statutory process. This is because such an allegation is unlikely to satisfy either of the two jurisdictional errors identified by the plurality in Futuris, which operate to render an assessment unlawful.

In Futuris, the High Court upheld the Commissioner’s argument that the Full Federal Court erred in upholding the taxpayer’s judicial review application alleging the Commissioner acted in bad faith by issuing two assessments to the same taxpayer in respect of the same amount. According to the plurality (Justices William Gummow, Kenneth Hayne, Dyson Heydon and Susan Crennan), the taxpayer could only challenge the validity of the assessments in statutory review proceedings as they were protected by the no invalidity provision in section 175.

As the plurality explained, an assessment will not answer the statutory description of ‘assessment’ for the purposes of section 175 where it is either ‘provisional’ or is otherwise tainted by conscious maladministration (which is ‘not lightly to be made or upheld’). In these two instances (neither of which arose in Futuris), a court can investigate the due making of the purported assessment within their original jurisdiction unhampered by the burden of proof imposed on taxpayers under the preceding statutory review process.

Federal Court decisions handed down since Futuris have sought to definitively limit the categories of cases in which tax assessments can be reviewed to the two jurisdictional errors identified in Futuris. However, not all Australian courts share this view, with one Supreme Court judge from Tasmania and another from Victoria disagreeing.

There must be a genuine attempt to ascertain taxable income

In my article of 2019, I argued that it is both apocryphal and repugnant to the rule of law to limit jurisdictional error relief in the manner suggested by the Federal Court. The case of Futuris did not consider a broader sense of bad faith (apart from conscious maladministration), which can operate to vitiate exercise of the assessment power.

Considering the serious evidentiary barriers inhering in the statutory review process, only judicial review can safeguard against an arbitrary or unreasonable finding of fraud or evasion. It is the constitutional duty of courts to grant appropriate and available remedies to ensure the Commissioner does not issue an assessment beyond power.

This will be the case where there is no evidence from which it can rationally be inferred ‘there has been’ fraud or evasion. Such an allegation must fail if raised in statutory review proceedings, albeit that it implies the Commissioner acted capriciously or arbitrarily in amending an assessment at any time.

The findings in my 2019 article can be further bolstered by drawing an analogy between exercise of the Commissioner’s power to amend at any time with the requirement for the Commissioner to make a genuine attempt to ascertain the taxable income of a taxpayer before making a default assessment under section 167 of the Income Tax Assessment Act 1936.

Given the serious financial and reputational implications, as well as legislative intention to promote certainty and taxpayer confidence, to be a genuine attempt, there must at least be some rationally probative evidence from which it may be inferred the taxpayer was involved in blameworthy or unlawful conduct directed at concealing from the Commissioner what would otherwise have been assessable amounts.

Cases litigated to date (Chhua and Buzadzic) have not sought to argue the ‘no evidence’ judicial review ground in the manner described above. However, given extant evidence of improper ATO practice and the Government’s unwillingness to reverse the burden of proof, taxpayers must continue to try and convince courts against definitively applying Futuris to ensure the Commissioner’s increased reliance on fraud or evasion assessments is authorised.

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Civil Society Organizations and Taxation: Emerging Trends and Priorities https://www.austaxpolicy.com/civil-society-organizations-and-taxation-emerging-trends-and-priorities/?utm_source=rss&utm_medium=rss&utm_campaign=civil-society-organizations-and-taxation-emerging-trends-and-priorities https://www.austaxpolicy.com/civil-society-organizations-and-taxation-emerging-trends-and-priorities/#respond Wed, 03 Feb 2021 21:42:58 +0000 https://www.austaxpolicy.com/?p=79339 During the summer of 2020, the International Budget Partnership (IBP) and the International Centre for Tax and Development (ICTD) worked collaboratively to conduct a broad… Read More ›

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During the summer of 2020, the International Budget Partnership (IBP) and the International Centre for Tax and Development (ICTD) worked collaboratively to conduct a broad scan of civil society organizations (CSOs) working in the taxation space with a specific interest in domestic taxation. Our objective was to create a comprehensive picture of the emerging field, understand its general features, the challenges faced by CSOs and to provide a resource for others, including CSOs, governments and donor agencies. This scan coincided with the emergence of IBP’s Tax Equity Initiative, which “works to promote citizen engagement with budget policies and processes to make them more equitable and inclusive”. The ICTD has continued to deepen its work in this field, launching a Tax and Civil Society research programme earlier this year.

The global CSO scan

The CSO scan database presents 171 organizations working across 66 countries and 7 regions, and provides a comprehensive overview of what each organization does, the types of work they are engaged in, how they approach their work (theory of change), the types of taxes they focus on (both domestic and international), whether they are part of any international networks and lists their primary publications on tax from recent years.

Insights from the scan, complemented by findings from an online survey and in-depth interviews conducted with select organizations, are summarized in IBP’s new paper “Of Citizens and Taxes: A global scan of civil society work on taxation.”  While the paper provides a comprehensive look at the characteristics of the organizations, this blog highlights trends from low- and middle-income countries and provides some ideas for how CSOs and others in this space can use the scan in their work.

International and regional networks

The CSO scan revealed that strong regional and international (both South-South and North-South) civil society coalitions exist in this space. Networks such as Tax Justice Network Africa, Latindadd and Tax and Fiscal Justice Asia have contributed to an environment in which civil society groups have been able to enter into tax work, receive support, and build capacity around issues of taxation, enabling greater engagement in international and domestic debates around tax policy, tax reforms, and tax administration. A few key findings emerge within each of the regions:

  • The Asian CSOs, compared to other organizations in the sample, are the most heterogeneous in terms of aims, ideologies and practice. This is unsurprising given the continent’s size and varying socioeconomic and cultural contexts. There is however noticeably less coordination and fewer networks and linkages between the listed organizations.
  • The sub-Saharan Africa sample is also diverse in terms of the type of work organizations are undertaking. Across the region, there is a general dependence on large aid bodies, charities, and state aid organizations with fewer fully independent or locally funded CSOs. While Asian CSOs tend to have links with trade unions and labor organizations, this is less apparent in sub-Saharan Africa. Nevertheless, there is a growing number of national-level CSOs increasingly involved in issues around domestic revenue mobilisation, likely due to encouragement from organizations like TJN-A, which has robust membership on the continent.
  • In the Middle East and North Africa, organizations tend to have a more consistent focus on domestic tax policy, civil society participation, and fiscal transparency. These issues are often addressed in connection with broader social issues such as democratic participation, civil rights, and gender disparities. The Arab NGO Network for Development (ANND) plays a central role by facilitating and publishing most of the research and reports produced in the region.
  • In Latin America, Latindadd is a crucial network and is an example of a pioneer in South-South cooperation, illustrated by its extensive collaborations with the Africa Forum and Network on Debt and Development. The existence of these networks is important as they provide a space for collaboration and sharing of best practices, especially given the relatively new tax policy practice arena in many lower-income countries.

What does this mean for civil society work going forward?

The CSO scan is a useful tool for organizations in lower-income countries, which are becoming increasingly prominent in the taxation space, thanks largely to the work done by regional and international networks. The work that for example Latindadd is undertaking to foster South-South cooperation can be facilitated through this scan. Organizations can search for partners within and across countries which are doing similar work and form linkages to either collaborate on mutual areas of interest or learn from each other. Where such linkages may exist at the regional level, not all CSOs in the scan are part of a network. This scan additionally provides an avenue for inter-regional learning amongst CSOs. The focus on domestic taxation is important, as this has largely been a neglected area of work in these regions.

For IBP and other large (I)NGOs, the scan can be used to scope out interesting CSO partners to support in countries of interest. It can also be used to connect existing in-country CSO partners (that for IBP, work on budget issues) to CSOs that are working on tax, specifically. Organizations like the ICTD can use the scan to align research work with policy interest areas. For example, the scan shows that many organizations are interested in – and work on – tax expenditures, but evidence on their effectiveness as policy tools is scant at best. Accordingly, there is scope for research on the impacts of tax expenditures that might help both civil society and governments do a better job at identifying policy priorities and targeting interventions. There are also some regional gaps in CSO activity, the key one being in Asia, and this is an opportunity for donors, international NGOs, and large regional CSOs to foster and support more tax work in this area. These actors can also play a role in addressing CSO constraints, particularly in funding and capacity (technical and human resources) which would go a long way in shifting the locus of influence and power from regional networks to national and grassroots CSOs.

While the CSO scan tells us a lot about what the field broadly looks like at the present moment, there are large opportunities for future research and work. In exploring these new avenues, the ICTD and IBP intend to continue collaborating and engaging with each other to support CSO capacity building and research targeting key topics and capabilities. These include topics such as: the effectiveness of CSO engagement in tax policy-making; how broad popular support can be encouraged for progressive tax policy agendas; or even what the impact of Covid-19 has been on progressive tax policy advocacy.

 

This blog was first published on 20 November 2020 by the International Budget Partnership (IBP) and the International Centre for Tax and Development (ICTD) and can be found on their websites: IBP/ICTD.

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ATO Garnishee Notices: Frustrating Corporate Rescue Policy https://www.austaxpolicy.com/ato-garnishee-notices-frustrating-corporate-rescue-policy/?utm_source=rss&utm_medium=rss&utm_campaign=ato-garnishee-notices-frustrating-corporate-rescue-policy https://www.austaxpolicy.com/ato-garnishee-notices-frustrating-corporate-rescue-policy/#respond Sun, 31 Jan 2021 22:48:42 +0000 https://www.austaxpolicy.com/?p=79248 The Commissioner of Taxation’s power to issue notices under section 260-5 of Schedule 1 to the Taxation Administration Act 1953 (otherwise known as garnishee notices)… Read More ›

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The Commissioner of Taxation’s power to issue notices under section 260-5 of Schedule 1 to the Taxation Administration Act 1953 (otherwise known as garnishee notices) is one of the ‘firmer action’ tools that the Australian Taxation Office (ATO) has at its disposal to enforce the tax law and ensure prompt collection of tax debts. The issue of these notices also provides an avenue for the ATO to create a de facto priority in bankruptcy and corporate insolvency.

This privileged position thus frustrates the Commonwealth Government’s clear policy of encouraging corporate rescue, particularly during the COVID-19 crisis when viable businesses need all the help they can get to explore survival.

Case law on the validity of garnishee notices

There is a breadth of case law entrenching the wide reach of the ATO’s garnishee power.

One of the leading authorities on the validity of notices served by the ATO is the Federal Court’s 1989 decision in Deputy Commissioner of Taxation (DCT) v Donnelly. In that case, the Court had to consider the ATO’s status as a priority creditor by determining whether the ATO was a ‘secured creditor’ for the purposes of section 58(5) of the Bankruptcy Act 1966. Justice Hill noted the striking similarity between the effect of a section 218 notice (predecessor to section 260-5) and garnishee proceedings, which was influential in His Honour’s conclusion that the ATO was a secured creditor.

In the 1999 decision of the Full Court of the Federal Court in Macquarie Health Corporation Ltd v Commissioner of Taxation, the Full Court held that just as the service of a section 218 notice made the ATO a secured creditor for the purposes of the bankruptcy law in Donnelly, so it made the ATO a secured creditor for the purposes of section 471C of Corporations Law (now section 471C of the Corporations Act 2001, see our paper for further detail). Accordingly, for the purposes of the Bankruptcy Act 1966 and the Corporations Act 2001, a charge is created in the ATO’s favour by virtue of the service of the garnishee notice, so that the ATO becomes a secured creditor for bankruptcy purposes, and on a liquidation.

The ATO’s discretion

In Practice Statement Law Administration PS LA 2011/18 (as updated on 3 July 2014), the ATO sets out its practice in relation to the issuing of garnishee notices. The ATO recognises that the issue of a garnishee notice is an exercise of a coercive power, so care must be taken when exercising this power.

The ATO’s practice is that where the tax debtor is subject to external administration subsequent to the issue of a garnishee notice, it will not ordinarily withdraw that notice. In that regard, the notice will continue to operate on the relevant amounts under the notice. Where it is apparent that the tax debtor is about to enter or become subject to external administration, the ATO will only issue a garnishee notice in respect of amounts due (or expected to become due), after having taken into account a number of factors. These factors include the need to protect the revenue and the expected impact that the garnishee notice will have on the tax debtor’s unrelated, arm’s-length creditors, in terms of their likely receipts from the tax debtor’s insolvency administration.

Review of the ATO’s decision to issue garnishee notices

There are a number of cases where the courts have reviewed the ATO’s decision to issue garnishee notices pursuant to the Administrative Decisions (Judicial Review) Act 1977.

One such case where the taxpayer was successful was the 2013 Federal Court decision in Denlay v Commissioner of Taxation, which involved Part IVC (Taxation objections, reviews and appeals) of the Taxation Administration Act 1953. The ATO obtained judgment in respect of the taxpayer’s outstanding debts; however, enforcement of the judgment was stayed by the Supreme Court of Queensland pending the outcome of the Federal Court income tax appeals. The stay was granted because enforcement of the judgment would likely cause the bankruptcy of the taxpayers and result in inability to prosecute their challenges to the assessments. The ATO challenged the stay and was unsuccessful, so then proceeded to issue garnishee notices requiring remittance to the ATO of the remaining amounts held in each taxpayer’s superannuation account.

Justice Logan held that the order of the Supreme Court of Queensland to grant a stay was a relevant consideration that was not taken into account by the ATO. Justice Logan said that the considerations for a court when granting a stay of execution are equally relevant ones for the ATO to take into account when deciding whether or not to issue a garnishee notice. Further, given that the appeals were at an advanced stage, the merits of a Part IVC application were a ‘highly relevant consideration’. Justice Logan held, quashing the decision to issue the notices, that the ATO’s decision to issue notices under section 260-5 was so unreasonable that no decision-maker, acting reasonably, could have so decided. However, Justice Logan made it clear that the outcome was based on the facts and the need for the ATO to have taken into account the considerations relevant to a stay. In that regard, the great weight that is given by courts to the legislative policy of the tax law which accords priority to the recovery of tax debts notwithstanding the existence of Part IVC of the Taxation Administration Act 1953 proceedings, will seem inequitable to the vast majority of taxpayers who bring appeals on bona fide grounds.

The impact on corporate rescue

The issue of whether tax debts should be given priority in a corporate insolvency has been debated extensively. In 1987–88, the Australian Law Reform Commission conducted an extensive inquiry into insolvency which resulted in the Harmer Report. The Report recommended the tax priority be abolished and set forth a number of arguments in favour of its removal. One was the concern that priority would discourage attempts to rehabilitate companies in financial distress, undermining the Voluntary Administration regime proposed in the Harmer Report.

In the last two years, there have been key reforms implemented which together represent the most significant change to Australia’s corporate rescue laws since 1993. These reforms include amendments prohibiting ‘ipso facto’ clauses on the event of Voluntary Administration, Receivership, or a Scheme of Arrangement under Part 5.1 Corporations Act 2001 and, in relation to insolvent trading, the ‘safe harbour’ carve-out from liability under section 588G Corporations Act 2001. Both reforms resulted from a clear government agenda to promote corporate rescue, and early action to deal with financial distress, as part of an enterprise culture. In the last few months, the Government has introduced a Bill to incorporate into the Corporations Act 2001 a new restructuring procedure for small business, aimed to assist companies that meet the eligibility requirements by allowing the directors to stay in control, under the oversight of an insolvency practitioner, while a plan is formulated to put to creditors.

The tension between the ATO’s focus on revenue protection on the one hand and the legitimate objectives of corporate insolvency law on the other, will continue to escalate in the current COVID-19 economic climate where many businesses are likely to experience considerable financial hardship, even after the unprecedented Federal and State government stimulus measures for business are implemented. The Government has made amendments to personal and corporate insolvency laws to provide temporary relief to debtors in connection with compulsory insolvency processes. This applies to statutory demand and bankruptcy notices, as well as providing a temporary ‘safe harbour’ from insolvent trading liability (ended on 31 December 2020).

For this reason, it is considered imperative that the ability of ATO to achieve this de facto priority and thereby frustrate corporate rescue attempts, be removed, so that companies that show signs of long-term viability have the best chance of survival post-insolvency.

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How Can We Compare Tax Systems? https://www.austaxpolicy.com/how-can-we-compare-tax-systems/?utm_source=rss&utm_medium=rss&utm_campaign=how-can-we-compare-tax-systems https://www.austaxpolicy.com/how-can-we-compare-tax-systems/#comments Wed, 16 Dec 2020 21:00:14 +0000 https://www.austaxpolicy.com/?p=79000 Beyond tax rates, how can we compare tax systems? In a recent policy brief, we reviewed and evaluated some recent efforts to make cross-country comparisons… Read More ›

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Beyond tax rates, how can we compare tax systems? In a recent policy brief, we reviewed and evaluated some recent efforts to make cross-country comparisons of tax systems, particularly those using indices and rankings to evaluate competitiveness and complexity.

We find that indices are useful in identifying tax reform trends across the world and comparing performance between countries but policymakers should be aware of their limitations and exercise caution in using their findings.

Comparing tax systems not just tax rates

Traditionally, tax rates have been the main indicator used for comparing the competitiveness of country tax systems. Such an approach fails to consider multiple aspects of the tax system. As Slemrod and Gillitzer (2013) argue, ‘tax policy is really tax-systems policy’.

Effective tax policy depends on the interrelationship between different aspects of taxation, including tax rates, tax bases, administration, enforcement and compliance. Think tanks and international institutions have started to account for the multidimensional nature of tax systems and to provide more comprehensive rankings or comparisons of tax competitiveness and complexity around the world.

Some organisations have developed a composite index that aggregates multiple indicators to compare performance of a variety of taxes and administrative processes. A well known example is the report on Paying Taxes authored by the World Bank and PWC. Paying Taxes is part of the World Bank’s flagship Ease of Doing Business Index, but it has gained prominence since its establishment and its findings are published as a standalone report annually.

Other composite indices include the Tax Foundation’s International Tax Competitiveness Index, the LMU Munich and the University of Paderborn’s Global MNC Tax Complexity Project, and the UNSW Business School’s VAT Compliance Burden Index.

There are also indices that focus on comparing national tax systems which are featured in global business studies such as the IMD’s World Competitiveness Yearbook – Tax/Fiscal Policy and the TMF Group’s Global Business Complexity Index – Accounting and Tax.

These indices are popular because they provide a simple and clear way in which national tax systems can be assessed and compared on an aggregate level. They also allow ranking of countries.

Another approach to comparing tax systems is based on surveys of taxpayer perception or experience of systems. Like indices, perception surveys can be designed to produce a simple and clear indicator which compares, for example, what taxpayers think of different countries’ tax system generally. Yet, they do not allow further breakdown into detailed aspects of the tax systems. On the contrary, databases collect large amount of data on multiple aspects of different country tax systems. But they, on their own, do not tell us anything about tax competitiveness or complexity.

What do tax system indices measure and cover?

All tax system indices seek to measure and aggregate a number of facets. Yet, as the idiom says, ‘the devil is in the detail’. The topics covered in and measured by these indices can be quite different.

For example, Paying Taxes has four sub-indicators: one is for assessing the level of tax rates in the surveyed jurisdiction and three others for the administrative burden faced by businesses (time to comply, number of payments, and refunds and corrections). It covers not just taxes, but also other government-mandated charges such as social security contributions. It uses a hypothetical firm approach, basing its analysis on a case scenario of a typical medium-size company in the surveyed jurisdiction and then getting a sample of experts who are familiar with the jurisdiction to measure the taxes and mandatory contributions that the hypothetical business must pay, based on the jurisdiction’s laws and regulations, as well as the administrative burden the firm must bear for complying with and paying those taxes and contributions. It does not measure top marginal tax rates.

The International Tax Competitive Index includes five sub-indicators: corporate taxes, income taxes, consumption taxes, property taxes and policies with respect to the treatment of cross-border income and transactions. Similar to Paying Taxes, it considers both tax rates and the administrative burden faced by taxpayers. The survey applies the top nominal marginal tax rate as the basis for its tax rate comparison. It also considers how the tax systems are structured in the surveyed countries, including whether they are neutral between different activities or investments (not favouring some activities over others). A country will score worse on this Index if that country provides incentives to certain industries or activities.

The Global MNC Tax Complexity Project is unique in covering the entire tax policy making and administering cycle, from enactment of tax laws to decisions of the judiciary in tax cases. Unlike other indices, it goes beyond how taxes are complied with and paid. However, it focuses only on the corporate income tax system faced by multinational corporations (MNCs), and does not cover other taxes.

Table 1 below (click to enlarge) summarises the construction of the main tax system indices.

Low correlations between tax indices and rankings

We compared the country rankings of the 34 OECD countries that are featured in the latest publicly available tax system rankings. These countries are ranked in the 2020 Paying Taxes report, the 2019 International Tax Competitive Index, the Global MNC Tax Complexity Project and the 2020 IMD World Competitive Yearbook’s Tax Policy indicator.

Table 2 shows that the rankings of the 34 OECD countries in these four indices have quite low correlation for these four indices. While the indices do measure different things, all of them advertise themselves as being about tax competitiveness in one way or another. The divergence in rankings across indices illustrates the subjective nature of ranking the tax systems of different countries.

The position of various countries within different rankings also varies considerably (see the appendix to our Policy Brief). For example, Australia ranked high in the International Tax Competitive Index (7 out of 36 countries) and the IMD World Competitive Yearbook’s Tax Policy rankings (8 out of 36 countries). But Australia ranks much lower in the Global MNC Tax Complexity Project (no. 26 out of 34) and near the middle in Paying Taxes (no. 17 out of 36).

A contribution to knowledge, but caution required

Tax system indices and rankings are helpful because they summarise large amounts of complex information about a national tax system to aid overall cross-country comparison. However, these indices have important limitations. Research suggests some of the issues are:

  • They ignore the particular political, economic and social context of individual countries.
  • Ranking and scoring can be misleading, even though they provide a simple, clear point of reference.
  • Weights used in assembling the rankings are ad hoc and based on subjective assessments of the importance of various elements of the tax system.
  • Indicators may not capture what particular individuals may care about.
  • The source of data used to inform the indices is varied and has limitations.
  • They may drive ‘unhealthy’ tax competition.

There is no sense in which being ‘number one’ in any of these rankings would automatically equate to having a tax system which is ideal for one’s country. Competitiveness of a tax system tells us very little about how the overall tax and transfer system achieves policy intentions which may include multiple objectives including fairness and equity.

We conclude that policymakers can learn from tax indices but should be cautious in applying the indices and country rankings in them. They should consider the specific context of a country before using the findings of these indices and rankings to support proposals for tax reform.

 

 

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Happy Holidays from Austaxpolicy https://www.austaxpolicy.com/happy-holidays-from-austaxpolicy-3/?utm_source=rss&utm_medium=rss&utm_campaign=happy-holidays-from-austaxpolicy-3 https://www.austaxpolicy.com/happy-holidays-from-austaxpolicy-3/#respond Wed, 16 Dec 2020 20:58:00 +0000 https://www.austaxpolicy.com/?p=78993 As the year 2020 comes to an end, the Austaxpolicy team would like to take this opportunity to thank all of our contributors and readers… Read More ›

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As the year 2020 comes to an end, the Austaxpolicy team would like to take this opportunity to thank all of our contributors and readers for your support and contributions throughout the year. We know this year has been tough for many and we hope the end of the year holiday season could offer some respite and serve as a reset for a better year in 2021.

There is no doubt that the pandemic has had a profound impact on tax and transfer policy debate. Many governments have resorted to unconventional measures such as paying direct wage subsidies to firms to keep jobs, which were unthinkable before the crisis. There are renewed calls for a more progressive tax and transfer system and policy ideas such as universal basic income and a wealth tax are being revisited in the light of the pandemic. Many are concerned about the sustainability of public finances and there are pushes on various fronts for governments to use this ‘once-in-a-100-year’ crisis as an opportunity to undertake bold, yet well-considered, tax reform for the betterment of society. Many of these issues are featured in our blog articles this year. While COVID-19 disrupted the economy and sent many of us into lockdown in Australia and around the world, we are honoured to have continued support from seasoned academics, policy experts, and early career and young researchers on a wide range of tax, transfer and public finance issues.

In 2020, we published 98 articles written by 108 experts across academia, government, and international organisations. We also posted more than 260 news pieces. Many of them are about the impact of COVID-19 on the economy and the lives of people and government responses to the crisis, for example JobKeeper, JobSeeker as well as other measures, in Australia and overseas. We also continued to present the latest research from academia and our authors shared their tax and transfer policy insights for a post-COVID world. In September and October, we held our annual Budget Forum (it was later than usual because of the delay of the 2020-21 Australian Budget) and our authors debated various budget measures from different perspectives.

During the year, more than 50,000 readers visited our blog and we recorded more than 81,000 page views. More than half of our readers are from Australia and we are also followed by overseas readers from the United States, the United Kingdom, India, China and other countries.

We are taking our down under summer break from publishing the blog from today. We will return with new energy and great new posts in February 2021. From now till then, you may pick up the articles you missed during the year, by searching for Topics or Authors, or just browsing the site. We have also compiled our top ten new articles in 2020 and the top ten articles over the last three years (2018-2020) below.

All the best for a restful and peaceful holiday and a happy new year from the Austaxpolicy team!

 

From Mathias Sinning, Miranda Stewart, Sonali Walpola and Editorial Assistant Teck Chi Wong.

 

Top ten new articles from 2020

  1. The Tax System Implications of Universal Basic Income (28 February 2020), by Myles Bayliss.
  2. Tax Incentives and Foreign Direct Investment in Developing Countries (9 March 2020), by Athiphat Muthitacharoen.
  3. [Budget Forum 2020] Progressivity and the Personal Income Tax Plan (22 October 2020), by Sonali Walpola and Yuan Ping.
  4. The Government’s Fiscal Tool Kit for COVID-19 (7 April 2020), by Miranda Stewart and Peter Whiteford.
  5. JobKeeper Could Be a Depression Beater (9 April 2020), by Chris Edmond, Steven Hamilton and Bruce Preston.
  6. How Equivalized Household Incomes Are Misinforming Tax and Transfer Policy (26 October 2020), by Patricia Apps and Ray Rees.
  7. Analysing New Zealand’s Digital Services Tax Proposal (23 April 2020), by Benjamin Walker.
  8. Social Security and COVID-19: Exposing the Limits of Social Protection? (20 April 2020), by Jane Millar and Peter Whiteford.
  9. Let’s Finally Reform the Tax System (28 April 2020), by Robert Breunig.
  10. Child Budgeting During COVID-19: The Case of Indian State of Karnataka (6 August 2020), by Jannet Farida Jacob and Lekha Chakraborty.

 

Top ten articles from 2018 to 2020

  1. No Case for Tightening the Age Pension Means Test: A Response to Michael Keane’s Analysis (26 July 2019), by Andrew Podger.
  2. The Impact of GST on Small and Medium-Sized Enterprise Owners in the Malaysian Retail Sector (13 March 2018), by Yong Mun Ching, Jeyapalan Kasipillai and Ashutosh Sarker.
  3. Should We Tax Sugar — and If So, How? (17 June 2019), by Peter Lloyd and Donald MacLaren.
  4. Politics of Taxation in the Roman Empire (28 February 2019), by Sven Günther.
  5. Consumption Taxation in Rawls’ Theory of Justice (5 September 2019), by David Elkins.
  6. Pay Disclosure: Information Is Power for Employers and Empowers Employees (23 July 2018), by Kristen Sobeck and Robert Breunig.
  7. Tax Havens: The Little Islands That Are Costing You Big Money (25 September 2018), by Andrew Leigh.
  8. [Budget Forum 2019] Tax Offsets and Equity in the Scheme for Taxing Resident Individuals (17 April 2019), by Sonali Walpola and Yuan Ping.
  9. Social Security and Robo-Debt (5 June 2018), by Terry Carney.
  10. Australia’s Mature Age Worker Tax Offset: The Employment Effects and Fiscal Cost Consequences (15 October 2018), by Andrew Carter and Robert Breunig.

 

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Age-Dependent Risk Aversion: Re-Evaluating Fiscal Policy Impact of Population Ageing https://www.austaxpolicy.com/age-dependent-risk-aversion-re-evaluating-fiscal-policy-impact-of-population-ageing/?utm_source=rss&utm_medium=rss&utm_campaign=age-dependent-risk-aversion-re-evaluating-fiscal-policy-impact-of-population-ageing https://www.austaxpolicy.com/age-dependent-risk-aversion-re-evaluating-fiscal-policy-impact-of-population-ageing/#respond Sun, 13 Dec 2020 21:24:55 +0000 https://www.austaxpolicy.com/?p=79056 Fiscal sustainability and optimal fiscal policy are central issues to demographic changes. Without reform, studies suggest that the current United States social security system will… Read More ›

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Fiscal sustainability and optimal fiscal policy are central issues to demographic changes.

Without reform, studies suggest that the current United States social security system will not be able to sustain a balanced budget. With social security that is largely a pay-as-you-go program, social security benefits payout to beneficiaries will gradually exceed payroll tax revenue from today’s workers when there is a shift in the population share towards older cohorts.

To address this problem, many studies have evaluated and compared commonly available fiscal reform options in terms of their policy outcomes on macroeconomic performance and social welfare. Among the widely used policy options are to increase the payroll tax rate, to reduce social security benefits, and to extend the retirement age.

However, my study suggests that the conventional evaluation approach may omit some important aspects which, when incorporated, will yield new insights and can alter the ranking of policy recommendations based on improvements to welfare.

How fiscal policy alternatives are usually evaluated?

The standard approach in macroeconomics models is to use consumption and leisure as determinants of wellbeing to evaluate welfare during demographic transitions. Reforms that allow households to consume more and enjoy more leisure will be more desirable in terms of welfare.

In this regard, the existing literature finds that reducing social security benefits or raising the retirement age are more welfare improving for future generations compared to increasing the payroll tax rates. This is because, even at the cost of less leisure time, higher labour supply, resulting from either being more independent in retirement financing or being eligible for social security benefits at an older age, gradually enables more consumption over time.

What are missing in the conventional framework?

My study argues that the conventional welfare assessment omits at least two important aspects: age-dependent risk aversion that plays a crucial role in economic decisions, and changes in future uncertainties that may complicate individuals’ lifetime planning. But why are these two aspects necessary?

First, for most people, welfare improves not only with consumption and leisure but also with how well individuals can follow through their life plans with certainty. In other words, most people are risk averse, preferring a certain stream of consumption and leisure over an uncertain one with the same expected value. Therefore, a spike in uncertainties for the same expected value will make planning more difficult and hurt welfare, as there will be a higher chance that available resources for future consumption and leisure may deviate from people’s original plan. Accounting for such high uncertainties requires people to save more as a precaution, an amount which could have been used for instantaneous consumption and leisure if future uncertainties are low.

Consider a case of population ageing. People’s exposure to uncertainties will change as a result of policy reforms as well as the longer life expectancy that expands the planning horizon. In such a case, they may prefer a policy alternative that let them follow through their life plans with more certainty even at the cost of slightly sacrificing a part of their lifetime consumption and leisure.

Secondly, an aspect of age-specific behaviour plays an important role. The effects of incorporating uncertainty is amplified when people are increasingly risk averse with age. Intuitively, as people get older, their ability to earn extra income diminishes, making them less resilient to income shocks compared to younger adults. However, not only will this affect older adults’ decision, but younger adults will also increase precautionary savings expecting themselves to become more risk averse as they get old.

Any changes in policy-induced uncertainties will therefore affect welfare across all generations. The effect is direct, via changes in uncertainties; and indirect, via forgoing lifetime consumption and leisure to increase precautionary savings and keep the risk exposure under control.

What are the main findings?

My study develops a new framework that takes into account aspects of uncertainties and age-dependent risk aversion to revisit the welfare evaluation of fiscal policy alternatives. Based on the new framework, my findings suggest a different welfare ranking to prior studies that assume constant risk aversion across all ages.

Under the projected demographic transition, reducing social security benefits and extending the retirement age result in higher future uncertainties and make an individual’s retirement planning more difficult compared to the case of increasing payroll taxes. This therefore makes the first two options not as strongly preferred as previous studies have suggested.

Such higher uncertainties are caused by an increase in the wage rate for the reason that a higher capital to labour ratio is expected to be the result from the first two policy options, which will lead to higher income uncertainties as people progress in age.

For the case of reducing social security benefits, people will build up more savings to compensate for lower social security benefits payout, leading to higher capital intensity. Whereas for the case of extending the retirement age, people are required to spend more time in the labour force, for they will not receive benefits until the age of 75. This leads to a greater accumulation of assets that peaks closer to the new retirement age before running down at a more gradual pace due to higher benefit payout in the years post-retirement.

Together with the pattern of risk aversion as well as earning ability that depends on age, an increase in wage uncertainties will amplify adverse effects on welfare.

Future research

To summarize, my study suggests that in order to evaluate welfare impacts of demographic shocks comprehensively, it is crucial to factor in aspects of policy-induced uncertainties and age-dependent risk aversion, which together result in significant differences in policy implications compared to the more limited traditional approach. The new framework developed in my study serves as an initial step to do precisely this.

Future research may extend the framework to be more realistic by taking into account a risky rate of return on capital and intentional bequest motives, for example.

 

The full study can be found at https://cama.crawford.anu.edu.au/publication/cama-working-paper-series/17900/age-dependent-risk-aversion-re-evaluating-fiscal-policy

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