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Tax Value Method

This presentation explores the benefits and outcomes of implementing the Tax Value Method (TVM) in four instances: Capital Gains Tax (CGT), Myer Emporium case, Consolidation of Company Groups, and Sale and Leaseback transactions. It also discusses reform alternatives and future actions. The focus is on achieving desired outcomes and simplifying the income tax system.

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Tax Value Method

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  1. Tax Value Method

  2. Outline of presentation Part A: Four instances for benefit Part B: Observations on the four instances Part C: What benefits arise? Part D: Reform alternatives to TVM Part E: Future actions Part F: Summary

  3. Assumptions for presentation • Presentation focuses on outcomes and benefits sought from TVM, plus reform alternatives and reform actions • Presentation assumes that a case has been made for reform of the income tax system (“The Essential Thesis”) • Presentation assumes operation of TVM is understood (“The Mechanism”)

  4. Part A: Four instances for benefit

  5. CGT: No regime required! • TVM automatically brings all capital gains and capital losses to account • Only need rules for 50% discount, small business concession and capital losses • TVM reduces CGT law. So far, • 126 pages  29 pages • 39 CGT events  2 events (likely) • Why? • Net income calculation captures gain/losson all assets/liabilities

  6. CGT: Predicted administrative benefits • Estimated administrative and compliance improvements could be: • 51% reduction in CGT related rulings • 32% reduction in CGT related litigation • 180,000 fewer phone calls to ATO p.a. • 19,000 fewer requests for amendment p.a. • 15,000 fewer letters p.a. • 770 fewer objections p.a. • 800 fewer private binding rulings p.a.

  7. 1. $80m loan 2. interest12.5% p.a. 5. $80m loan repayment 3. $45.4massignment fee 4. Interestpayments Myer Emporium Facts: MyerEmporium MyerFinance Citicorp

  8. Myer Emporium under current law • Lower courts: • $45.4m not taxable, so • Parliament added new income alienation rules • Then High Court: • $45.4m taxable to Myer Emporium at time of assignment • Many sets of rules can now apply: • ordinary income, CGT, alienation rules, Division 16E, traditional securities

  9. Myer Emporium under TVM • Single set of rules apply to deny anticipated tax benefits • No gain arises on assignment because receipt equals tax value of the asset (right to interest) given up • $45.4m gain assessed over loan period, on accruals basis (TOFA rules apply) • Result reflects economic outcome

  10. Consolidation of Company Groups • Under consolidation proposals, allocation of tax values to assets and liabilities is complex because • consolidation requires the tax value of assets to be restated • assets/liabilities do not have a unique tax value under current law • complex law required to specify multiple tax values of certain assets • varied valuation rules apply

  11. Consolidation under TVM • Simpler to apply • Assets/liabilities have a unique tax value under TVM • Easier to restate this tax value on commencement of consolidation • Simpler drafting of consolidation legislation. Legislation less complex

  12. Sale of plant $50m Metal Manufactures State Bank Lease payments Lease of plant Metal Manufactures Facts:

  13. Metal Manufactures under current law • Commissioner argued portion of lease rental was a non-deductible capital expense • Full Federal Court: • finance lease could not be characterised as loan • lease payments were fully deductible. No portion was a capital expense • Effective outcome is a deduction for loan repayments • Will the Parliament make a legislative response?

  14. Metal Manufactures under TVM • Characterisation of the arrangement irrelevant • TVM effectively divides rental payments: • notional interest  ‘deductible’ • notional principal  not‘deductible’ • Reflects economic outcome because only actual losses recognised • Specific amendments to the law not required

  15. Part B: Observations on four instances

  16. These four instances deal with... • Current legislation • e.g. CGT • Current case law • e.g. Myer Emporium • Current policy development • e.g. Consolidation of company groups • Possible future policy development • e.g. Sale and lease-back transactions/Metal Manufactures

  17. What do the four instances show… Myer Emporium • Current income recognition faults are eliminated • Case law and litigation should be reduced • Tax scheme opportunities and incentives reduced • asymmetry and timing anomalies eliminated • some schemes not have tax advantages, so not happen

  18. What do the four instances show… CGT and “Myer Emporium” Rules • TVM reduces volume of law • Legislation shorter and simpler because: • one way of doing things • standardised core rules • no overlapping • Other areas will be shorter, or removed, for the same reasons (e.g. debt forgiveness rules)

  19. What do the four instances show… Consolidations • TVM improves current policy process • One way of doing things: • cohesive platform for policy development • simpler legislation means easier development • easier to identify policy departures • simplifies support products (e.g. publications explaining obligations)

  20. What do the four instances show… Sale and leaseback transactions • Future policy issues do not arise (or can be better handled) • advantage of standard core rules and cohesive principles • Reduces need to amend legislation • Demonstrates ability to deal with economic/commercial developments (even those not presently anticipated)

  21. What are wider implications? • Instances identified demonstrate positive outcomes from TVM proposal • Further instances where positive outcomes arise can be identified e.g. write off of IRU’s • Issue remains whether these outcomes will extrapolate into benefits for the income tax system per se

  22. Part C: What benefits arise from these instances?

  23. Benefits to legislation • Clearer and more coherent structure • e.g. better consolidations provisions • Better drafted provisions • Shorter and less complex • fewer provisions to assess specific circumstances (e.g. no specific CGT rules) • No gaps, no overlaps

  24. Benefits to law design • Standardised definition of income and core rules • cohesive platform for policy development (clear benchmark for assessing appropriate income and expenditure recognition) • easier to explain effect of policy decisions • easier to implement actual policy intent • no need to reinvent the wheel • Appropriate default treatment • fewer amendments

  25. Benefits to law users • One way of doing things • easier to analyse transactions and avoid errors • easier to understand and explain the law • easier to discern policy intent • Reduced volume of law • Less new law to learn and teach • Less support material • fewer rulings, cases

  26. Benefits to taxpayers • Law more certain • More appropriate assessments • closer to economic outcomes (e.g. no timing anomalies) • Less tax litigation (and less dispute) • Impact: • improved certainty in making business decisions • less resources diverted to tax planning and audits • improved support products

  27. Part D: Reform alternatives to TVM?

  28. Are other options available? • Three alternatives can be discerned: • piecemeal reform of particular problems • trialing TVM (e.g. with TOFA) • use accounting profit as taxable income • “Option 3” • Working Group proposal to (i) capture TVM benefits and (ii) provide an alternate approach to establishing case for TVM

  29. Piecemeal reform • Enact legislation for specific problems • e.g. relieve identified black hole expenses • likely to compound existing complexity • can only solve identified problems • Does not allow a single integrated systemic solution (unlike TVM) • discrete solution for each problem • lack of clear platform for future developments

  30. Trialing TVM • Another approach to piecemeal reform • Trialing is inconsistent with TVM’s “essential thesis” • TVM’s objective is to standardise the definition of income and use core concepts across the law • TVM mechanism already pervades current law • e.g. most recently in uniform capital allowances • TVM mechanism has a proven success record (e.g. trading stock, CGT)

  31. Accounting profit as taxable income • Adjustments required for • policy and jurisdictional issues (e.g. R&D, CGT discount, non-deductible gifts, non-residents, etc) • unrealised gains and losses • “Adjusted accounting profit” is equivalent to TVM • Gammie proposals are close to TVM

  32. Option 3: Working Group proposal • Implement components of TVM proposals if “Big Bang” TVM not adopted • Alternative to benchmark TVM against (other than current law) • Means to justify introduction of “Big Bang” TVM • Natural conclusion of incremental improvement is TVM! • Conduct as part of TVM Project (underBoard auspices). Resources? Funding?

  33. Part E: Future actions

  34. Proposed action plan for TVM • Complete draft legislation (including CGT, private and domestic, STS, non-residents) • Issue draft legislation, explanatory material and support products (returns, guidelines) for public comment • Undertake detailed compliance and consequence testing (Chris Evans, Neil Warren, et al) • Complete “Option 3” work • Review introduction timetable

  35. Board decision: Govt. decision: Board decision: Board decision: • Board to developprototype law andadministrationpackage • Continuedevelopment& evaluation? • Formal releasefor publiccomment • Recommendfuture actionto Govt. We arehere A deferred (realistic) timetable 10/8/00 20/9/01 30/9/02? 1/3/03? 1/7/04 or 1/7/05? Ralph review andrecommendation Communicate and educate Develop law and administration package Test and evaluate TVM in use Tax Reform Fatigue

  36. Part F: Summary

  37. What are the benefits of TVM? • TVM has benefits, but must be weighed against costs • TVM Project has benefits: • “spin-off” technology • insight into current tax system • Income tax system has three basic components: assessing, entities and administration • TVM Project is vehicle to improve the assessing function

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