Q: How would adopting the tax value method make the

income tax system more equitable?

A:
 The tax value method would make the income tax system more equitable because it would

treat different taxpayers with the same economic circumstances in the same way.

o It would do that because it deals with every transaction in one main way.

o The current law provides many different ways of treating a transaction depending on

how it is characterised. In some cases, more than one regime can apply to the same

transaction (for example, 5 different regimes can apply to the transaction in the Myer

Emporium case).

 The tax value method would only recognise actual gains and losses and would avoid the

timing anomalies that arise under the current law.

o The current law sometimes brings gains and losses to account before they are

realised and sometimes doesn’t recognise them even after they are realised.

o The current law doesn’t always bring gains and losses to account for both parties to

a transaction at the same time.

 Of course, even under the tax value method, special rules could still be put in place to

provide different treatments (for example, the simplified taxation system rules).

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Q: How would adopting the tax value method make the

income tax system more robust?
A:
  The tax value method would make the income tax system more robust because there would

be fewer ways to avoid tax under the tax value method.

o That would happen because the tax value method deals with all transactions in one

standard way and treats different taxpayers with the same economic circumstances

in the same way.

o There wouldn’t be a variety of different regimes, so there wouldn’t be any incentive to

re-characterise a transaction to move it to a more favourable regime.

o There wouldn’t be any timing anomalies to allow one party to a transaction a

deduction for a loss before the other party was assessed on the corresponding gain.

 For example, a sale and lease-back arrangement seeks to characterise what is really a loan

as a lease so that greater deductions can be claimed.

o Under accounting, these arrangements are both treated as finance arrangements.

o Similarly, under the tax value method, the different arrangements do not produce

different tax results because they are economically identical.

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Q: Would the tax value method improve compliance?

A:
 By reducing the cost of complying with the law, the tax value method may reduce an

incentive for taxpayers not to comply.

 The tax value method could also improve compliance because there would be fewer ways to

avoid tax.

o The tax value method deals with all transactions in one standard way and treats

different taxpayers with the same economic circumstances in the same way.
 o There would be a smaller variety of different regimes, so there would be less

incentive to re-characterise a transaction to move it to a more favourable regime.

o There wouldn’t be any timing anomalies to allow one party to a transaction a

deduction for a loss before the other party was assessed on the corresponding gain.

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Implementation issues
Q: How would you introduce the tax value method?
A:
 If the tax value method is to be introduced, introduction could happen in a number of ways.

 Introduction would involve identifying provisions relevant to the calculation of taxable income,

or referring to assessable income and deductions, in the 1936 and 1997 Income Tax

Assessment Acts and other Commonwealth statutes.

o Provisions replaced by the tax value method core rules would be repealed.

o Provisions being replaced by other business tax reforms not implemented before the

tax value method could be repealed as part of the implementation of those reforms.

o It would be necessary to examine other provisions for continued relevance and

perhaps rewrite them.

 Using an iterative approach, the tax value method could be introduced gradually, through a

series of amendments to the Income Tax Assessment Act 1997.

o This would involve enacting the tax value method core rules, and any other

provisions that could be written before the start date, to make the tax value method

the new way of working out your taxable income.

o Any provisions describing assessable income and deductions that were not redrafted

before the start date would be bridged into the tax value method framework with a
 transitional mechanism to make the provisions work within that framework. These

would be examined, and rewritten if necessary, after the start date.

 A big-bang approach would involve creating a new Act from scratch and developing it in

parallel with the existing Assessment Acts. It would only be implemented once the entire tax

value method law was drafted.

 The Income Tax Assessment Act 1936 has to be rewritten anyway, to complete the work of

the Tax Law Improvement Project, whether or not the tax value method proceeds. If the tax

value method proceeds, that rewrite could happen more efficiently.

o For example, the redraft of the key capital gains tax rules into the tax value method

format has reduced the size of the capital gains tax rules by more than 70 per cent. It

achieved that by removing the many rules that become redundant under the tax

value method.

Further information
 Chapter 4 of Tax value method: information paper discusses alternative approaches to

introducing the tax value method. This paper is on the Board website www.taxboard.gov.au.

The Board of Taxation is seeking written submissions to assist it in evaluating the feasibility

of introducing the tax value method and in determining how it could be introduced.

Submissions should be made by 30 April 2002.

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Q: How would introduction of the tax value method affect

individual taxpayers?
A:
 Any negative impact of the tax value method on individual taxpayers should be minimal.
  The information individuals need to complete a tax return probably won’t change.

o Two case studies based on the current TaxPack for individuals (including

the TaxPack supplement) show how taxable income could be worked out under the

tax value method.

o There may be some minor changes in the terminology used in TaxPack. For

example, in the case studies the term ‘reduction’ (label R) rather than ‘deduction’

(label D) is used.

 Tax offsets or concessions would not change under the tax value method.

Further information
 Attachment D to Tax value method: information paper contains two case studies showing

how taxable income could be worked out under the tax value method based on the

current TaxPack for individuals. This paper is on the Board website www.taxboard.gov.au.