Justice Edmonds

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2011 NATIONAL

GST INTENSIVE

Session 1:

Judicial Assessment of the Performance of

the Goods and Services Tax as an

Instrument of Tax ReformPa er

Written and presented by:

The Hon. Justice Edmonds, FTIA

Federal Court of Australia

National Division

8 9 September 2011The Langham, Melbourne

The Hon. Justice Edmonds, FTIA 2011Disclaimer: The material and opinions in this paper are those of the author and not those of the Tax Institute. The Tax Institute did not review thecontents of this paper and does not have any view as to its accuracy. The material and opinions in the paper should not be used or treated asprofessional advice and readers should rely on their own enquiries in making any decisions concerning their own interests.


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Judicial Assessment of the Performance of the Goods and Services Tax as an Instrument of Tax Reform

Justice R F Edmonds 8 September 2011

INTRODUCTION

1 I have described my address to you today as a judicial assessment of the performance of theGST as an instrument of tax reform only by reason of the fact that what I have to say is

sourced in my exposure to and experience with the GST as a judge of the Federal Court

hearing and deciding disputations between taxpayers and the Australian Taxation Office

(ATO) over the construction and application of the relevant statute (the GST Act). My use of

the word judicialis not intended to distinguish or elevate what I have to say from what any

other commentator might have to say in undertaking such an assessment. Indeed, my

exposure to and experience with the GST Act will no doubt be similar to that of many here

today who regularly practise in the area.

2 What I am concerned to explore is how, after eleven years, the tax is travelling (a report cardso to speak) by reference to the benefits which were asserted would come with or follow

upon its introduction. And the asserted benefit by reference to which I wish to devote most

of my assessment is the asserted benefit of simplicity; that it would contribute to a reduction

in the complexity of the tax system.

3 It will not come as a surprise for you to hear me say that, in my view, the GST has totallyfailed to reduce complexity in the tax system; indeed, if anything, it has contributed toincreased complexity. My concern at this is not directed at identifying those responsible for

this failure be it the policymakers responsible for the design features of the GST; the

legislators for introducing politically-driven changes to the design of the policy makers; the

draftsmen in articulating the words of the statute; the administrators for the way in which

they administer the statute; or the judiciary for the way in which they construe and apply the

statute because, to a greater or lesser degree, blame or responsibility for the failure of the

GST to meet this generally accepted hallmark of tax reform can probably be sheeted home to

all these groups. My concern is to generate sufficient interest and will to do some thing about

it.

SETTING THE SCENE

4 It was in August 1998 that the Treasurer in the Howard Government, the Hon Peter ConstelloMP, announced the Governments intention to implement a broad based indirect tax to

replace the wholesale sales tax as well as a number of State taxes, adopting the terminology,

in use in New Zealand and Canada, of a goods and services tax (GST). Such a tax was to


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The Hon. Justice Edmonds, FTIA 2

be based on the value added tax (VAT) model adopted by nearly all OECD countries and

in many other countries around the world.

5 The introduction of such a tax had been recommended as far back as January 1975 when theAsprey Committee released its final report. The Fraser Government toyed with the idea,

but that Governments demise at the 1983 election put an end to any prospect of its

implementation at the time.

6 An alternative proposal of what has been described as an economically equivalent buttechnically simpler retail sales tax, that would apply to most goods and services, was

championed by the Treasurer in the Hawke Government, the Hon Paul Keating MP, as part of

Option C at the 1985 Tax Summit. Option C did not get up and the proposed retail sales tax

was despatched to the dustbin.

7 Next came Dr Hewson and his 1993 Fightback campaign, which incorporated a broad-based 15% GST as a central plank in the Liberal partys election policy platform.

Unfortunately for Dr Hewson, he could not articulate, when asked, how the tax would apply

to a childs birthday cake. In the result, the incumbent Prime Minister (the Right Hon Paul

Keating), as unpopular as he seemed to be and now totally opposed to such a tax, at least

politically, succeeded in holding office with the support of the true believers, whoever they

were.

8 John Howard won the 1996 election on a pledge never to introduce a GST if he ever becamePrime Minster, but went to the polls in September 1998 on a platform of tax reform,

including a GST, announced the preceding month.

The August 1998 Announcement:Not a new tax, a new tax system

9 Mr Costello heralded the proposed new tax on a platform that the existing taxation systemwas:

(i) out of date;

(ii) unfair;

(iii) internationally uncompetitive;

(iv) ineffective; and

(v) unnecessarily complex.


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He went on the say that the existing system was preventing the development of a more

efficient, relevant and accountable framework for Commonwealth-State financial relations,

but it is with respect to the first five criteria I propose to confine my comments and to confine

them to the proposed GST to the exclusion of other measures announced at the time.

An out of date system

10 Under this head, the Treasurer pointed out that the wholesale sales tax was introduced at asingle rate of 2.5% in the 1930s and applied to goods which at that time accounted for the

bulk of Australias economic activity. He said that today (referring to 1998) the story was

very different. The standard wholesale sales tax rate was now 22% and there were no less

than six different rates with the highest at 45%. He observed that the production of goods

now constituted less than one third of the national economy and the only way to maintain

revenue as a share of total tax revenue under the existing wholesale sales tax system was to

increase the rates because the tax base on which it was predicated was declining as a

proportion of economic activity. In the Treasurers words:

There is simply no sense in persisting with a system designed when modern businessstructures and financial transactions, and globalised economic activity, were not evenin prospect. The Australian economy has been transformed, but the tax system hasnot.

An unfair system

11 Under this head, the Treasurer observed that there was an unfairness in the tax mix in theAustralian economy moving as it had over the past two decades towards a higher share of

direct taxation and a lower share of indirect taxation. He pointed out that as revenue from

indirect taxes had declined, more of the burden has had to be carried by the income tax

system, and principally by wage and salary earners. Without comprehensive tax reform, the

tax mix will continue to shift automatically towards a greater reliance on direct taxation.

Internationally uncompetitive

12 Under this head, the Treasurer observed that the current system put Australian exporters at asignificant disadvantage in competing in overseas markets. It also disadvantaged Australian

firms competing with imported goods. Australias exports and import-competing goods and

services have to bear the burden of wholesale sales taxes which cascade throughout the

production and value adding processes, while no such burden is applied to the traded goods

and services sectors of Australias competitors. Moreover, the Treasurer observed that the


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current business tax systems thwarts business decisions and imposes excessive compliance

costs on businesses. The choice of business structures and investment is all too often

determined by variation in taxation treatment rather than the underlying profitability of the

investment. In the Treasurers words:

A more competitive business tax system with fewer distortions would result in theAustralian investment dollar going further and in reducing Australias reliance on

overseas savings.

An ineffective system

13 Under this head, the current tax system was said to be ineffective in that it provided acrumbling base from which to derive the necessary revenue to fund essential government

services, including those provided to rural and regional areas as well as those provided

through the social security system. The Treasurer observed that the Commonwealth would

become increasingly reliant on income taxation directly levied on individuals and companies

if it was to maintain funding for government services. The indirect tax base would continue

to decline, rates would need to be increased again and this debilitating cycle would continue.

A complex system

14 Under this head, the Treasurer observed that the current tax system was unnecessarilycomplex. Income tax legislation had grown from about 120 pages to more than 7,000 as a

result of 60 years of patching and filling. Over the past 15 years there had been over 650

different tax policy changes announced. The income support system had become equally

complex. There were currently over 30 major different types of income support payments

and supplements under the tax and social security regimes with variable tax requirements,

income thresholds and delivery mechanisms. As the complexity of the tax system has grown,

the Treasurer pointed out so too has the incentive for tax avoidance and minimisation.

Generally

15 Speaking more generally, the Treasurer said that the Governments tax reform plan was builton four pillars to achieve a fairer tax system:

(i) incentive: a fairer tax system with greater reward for effort;

(ii) security: sounder finances for government services;

(iii) consistency: a tax system which boosts business and investment and promotes

Australian exports; and


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(iv) simplicity: making the tax system easier to deal with.

Indirect tax reform

16 Specifically, the Treasurer announced that the wholesale sales tax was to be abolished andthat, in consultation with the States, nine types of State taxes (principally various kinds of

stamp duty) were to be abolished. A broad based GST operative from 1 July 2000 was to be

introduced at a rate of 10% to replace the wholesale sales tax, State taxes on bank

transactions, stamp duties on business related transactions and bed taxes. Registered

persons were to be able to claim input tax credits for the GST paid on purchases of business

inputs. The Treasurer listed the activities which were to be GST free as including:

(i) exports of goods and services;

(ii) international sea and air travel, and domestic air travel, purchased overseas by

non-residents;

(iii) virtually all health, education and child care services;

(iv) charitable activities;

(v) religious services; and

(vi) taxes and charges levied at all levels of government (including local

government rates and water and sewerage rates and charges).

Very small businesses with a turnover less than $50,000 per year and non-profit organisations

with a turnover of less than $100,000 would not have to register (but may choose to do so).

17 The Treasurer also announced that:(i) excises on petrol and diesel were to be reduced at the time of the GSTs

introduction so that pump prices need not rise;

(ii) wine and beverages consisting primarily of wine were to become subject to a

wine equalisation tax to replace the difference between the current 41%

wholesale sales tax and the proposed GST;

(iii) a single per stick excise on cigarettes was to be introduced from 1 July 1999

without reduction in tobacco excise a reform long advocated by health

experts;

(iv) a retail tax of 25% on luxury cars (above a GST inclusive $60,000 threshold)

was to be applied after the introduction of the GST to ensure that luxury cars

fall in price only by the same amount as a car just below the luxury threshold.


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18 Finally, the rate of the GST of 10% was to be locked in so that any request for a changewould need to be made to the Commonwealth unanimously by all State Governments.

ELEVEN YEARS ON

19 Eleven years of experience with the new tax is probably a sufficient effluxion of time for oneto make an assessment of the tax as an instrument of tax reform by reference to the generally

accepted criteria of fairness or equity, efficiency and simplicity although, I have no doubt that

the further effluxion of time, and the further experience that comes with it, will enable a more

informed assessment to be made. In many ways, the application of the tax, insofar as it

depends on judicial determination of how the statute is to be construed and applied to a given

set of facts, is still being bedded down although we are undoubtedly in a better position

today to make an assessment than we were ten, or even five, years ago. Hence my

expectation that with the further effluxion of time and experience we will be in a more

informed position to undertake that assessment than we are today.

Fairness or Equity

20 On the other hand, the criteria of fairness or equity is one which, arguably, does not becomemore informed with the effluxion of time. If a tax does not qualify under that criterion at the

outset, the likelihood is that it will never qualify. It is customary to distinguish between thetwo dimensions of horizontal equity that fairness dictates that persons in the same

situation should be equally treated and vertical equity those in different situations

differently treated, with those more favourably placed being required to pay more. A GST is

an inherently regressive tax by nature and as a stand-alone tax will never qualify on grounds

of vertical equity. That is why its introduction and any subsequent rate increase has to be

accompanied by adjustments to personal income tax rates, particularly to lower and middle

income earners, and by adjustments to social service transfer payments to compensate for its

effect. Some have suggested that such compensation might also be achieved by exemptions

for necessities, e.g. basic food, but the experience in this country already suggests that such

exemptions are at the risk of sacrificing simplicity.

21 On the other hand, horizontal equity was improved by the broadening of the base to includeservices, although many will argue that it is not comprehensive enough, and it is certainly not

as comprehensive as the New Zealand model. Nevertheless, the uniform rate means a similar

tax burden on all spending that does fall within its embrace, rather than the burden dependingupon consumer preferences for goods under the multi-rated wholesale sales tax.


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Efficiency

22 Minimisation of waste is the hallmark of efficiency and the minimisation of waste requiresthat the tax system should not influence individual and business choices. In other words,

efficiency dictates that neutrality should be the general aim of the tax system. The

introduction of the GST made Australias consumption tax base more efficient because it

replaced a range of narrowly based Commonwealth and State taxes. Nevertheless, it is less

efficient than it could be because of its failure to tax consumption on a truly comprehensive

basis as in New Zealand.

23 Moreover, there are inefficiencies with the way in which certain supplies are treated, inparticular, financial supplies. The Henry Review (Australias Future Tax System: Report to

the Treasurer, December 2009) found (at 303) that the input taxation of financial services

under the GST is inefficient, reduces competition and harms Australias position as a regional

financial services centre. It reported (at 304):

[E]stimates based on the existing GST system suggests that the current tax treatmentof financial services under the GST over-taxes business by around $760 million in2010-11, while the failure to fully tax household consumption of financial servicesresults in a $3.9 billion shortfall from the consumption tax benchmarks.

24 The Henry Review recommended that financial services should be taxed in an equivalent wayto other forms of consumption. That is, the consumption of financial services by Australian

households should be fully taxed and financial services used by business should be treated

like any other business input. According to the Review, there are a range of options for

achieving this, although the actual design of the tax should be informed by extensive

consultation with the financial services industry. For example, according to the Review, a

financial services tax could replace input taxation under the GST, and complement a cash

flow tax.

25 On 11 May 2010, the Assistant Treasurer issued a Media Release containing theGovernments responses to these findings. While conceding that the existing taxation of

financials services under the GST was a second- best approach and that it is inefficient,

resulting in tax cascading and adds complexities which increase compliance and

administrative costs, concluded that the existing legislative scheme was to be maintained:

The Government has agreed to maintain the current architecture of the financial

supply provisions, but it will make the following changes which will clarify the


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operation of the legislation and reduce compliance and administrative costs,particularly for many small businesses.

1. The financial acquisition threshold (FAT) input tax credit test will beincreased from $50,000 to $150,000, enabling many more small businesses toavoid being caught up in the financial supply regime. This is the firstincrease in this threshold since the GST was introduced 10 years ago.

2. The treatment of hire purchase agreements will be simplified by removingthe need to apply different GST treatments to different parts of the onesupply. By treating the whole supply as taxable, taxpayers will no longerhave to account for part of the supply as taxable and the other part as inputtaxed.

3. The attribution rules for hire purchase arrangements will be made the samefor both cash and non-cash GST taxpayers. This change should significantlyadvantage small businesses operating on a cash basis that have been forced

into higher cost chattel mortgages following the introduction of the GST.

4. The current special rules for borrowings will be amended to exclude bankdeposit accounts.

5. The range of expenses qualifying for a reduced input tax credit (RITC) willbe expanded to:

a. include acquisitions related to supplies of life insurance bysuperannuation funds to their members;

b. clarify that RITCs are available for lenders mortgage reinsurance aswell as lenders mortgage insurance; and

c. add a new item covering transactional fraud monitoring services.6. The current reduced input tax credit (RITC) rate of 75 per cent will be

retained.

7. The provisions allowing a RITC for trustee and responsible entity serviceswill be amended to protect the GST base by preventing these provisionsbeing used to allow RITCs for all acquisitions.

8. A technical amendment will be made to clarify the language and relationshipbetween various concepts (guarantees and indemnities).

It is anticipated that these measures will take effect from 1 July 2012.

26 This caused Michael Evans (The GST Treatment of Financial Services in Australia in GST inAustralia, Looking Forward from the First Decade (Thomson Reuters, 2011) Ch 6 at 158 to

write:

Unfortunately, the governments proposed changes do not address the fundamental

structural shortcomings of the legislative framework. Rather, the proposals are acombination of:


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Tinkering at the edges; and Plugging perceived revenue issues.

27 For the time being, the last word on this is perhaps the finding of the Henry Review at 313:To remove the adverse efficiency costs of input taxation on business and exports,financial services could be removed from the GST (effectively, made GST-free).However, this would have a large revenue cost and inappropriately exempt privateconsumption of financial services. The Australian government, in consultation withthe financial sector, could further develop an alternative method of taxing domesticconsumption of financial services to replace input taxation under the GST, or tocomplement a cash flow tax, to ensure that consumption of financial services istreated equivalently to other forms of consumption.

Simplicity

28 On the hallmark of simplicity, one could do a lot worse than to quote from the final report ofthe Asprey Committee at 3.19 to 3.22:

Simplicity3.19 After equity, simplicity is perhaps the next most universally sought after ofqualities in individual taxes and tax systems as a whole: like fairness it is a word that,in this context, points to a complex of ideas.

3.20 Two of these are explicitly stated in the Committees terms of reference. A

tax will be called simple, relatively to others, if for each dollar raised by it the cost ofofficial administration is small, and if the compliance costs, the costs in money andeffort of all kinds to the taxpayer. are also small. These two ideas arc of courseconnected, and add up to much the same as the ancient canon of certainty. Both costswill be the less if assessor and assessed can each establish with certainty what is due:uncertainty entails the costs of consultation with experts and sometimes the yetgreater costs of litigation. Both kinds of cost arc increased, and certainty isendangered, when a tax, whether in the interests of equity or of efficiency, requiresthe drawing of fine distinctions between what is and what is not liable, and whenthese distinctions involve such uncertain ideas as purpose or value to therecipient. Then the legal definitions get longer and longer and beyond thecomprehension of those untrained in the law, and the relevant facts in particular cases

become more and more disputable.

3.21. Two further aspects of simplicity require specific mention here. First, when(as is often unavoidable) a quite complex operation is needed before theadministrators can make the assessment or the taxpayer can ascertain his liability, itis desirable that the tax be such that the taxpayer, for private purposes unconnectedwith tax, already needs to perform such operations. A tax on company income maybe fairly regarded as a simple tax if the company already calculates its income orprofits on the same or very similar basis. A tax on personal income is not a simple taxif it be so structured that many taxpayers who would not otherwise wish (or withouthired help be able) to keep accounts at all, have to preserve many records and learn

sophisticated accounting. The point, though obvious, is often forgotten.


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3.22. A second observation is perhaps even more obvious and even more frequentlyforgotten. The fewer, per million dollars raised, are the individuals or organisationsfrom whom tax is collected the simpler is a taxation system. The sheikdom that canraise all the revenue it requires (and maybe much more) from a single tax on a singleoil company has what is unquestionably the simplest tax system of all.

29 The Henry Review found (at 287) that while the invoicecredit method of the GST hadinherent compliance benefits, they should not be overrated:

While business consumers have an incentive to ask for a tax invoice, consumershave no need for a tax invoice, as they cannot claim a tax credit. As such, taxcollected at the final retail stage is not self-enforcing. Moreover, the existence of atax invoice may assist but does not in itself ensure compliance. A false tax invoicemight be used to make a claim for a credit. A missing or absent tax invoice may beused to understate sales.

In addition, the widespread use of tax invoices as a basis of systematic cross-checking between tax paid and tax claimed, while simple in concept, is costly in practice. The ATOs compliance program is built largely on voluntary compliance,with targeted audit activity in response to emerging risks, rather than auditingmillions of routine transactions.

30 The Review further found at 289 that:Complying with the GST is costly for many businesses particularly smallbusinesses. Much of this complexity is structural, and flows from differential tax

treatment of different goods and services. The smallest businesses can be underpressure to be in the GST system.

It recommended at [56] that:

The government should consider making greater use of GST-free business-to-business transactions or reverse charging provided the potential compliance costssavings outweigh the additional complexity costs and risks to revenue.

31 These findings and recommendation attracted the following observation by Chris Evans andBinh Tran-Nam: Controlling Tax Complexity: Rhetoric or Reality? inAustralias Future Tax

System: The Prospects After Henry Essays in Honour of John W Freebairn, (Thomson

Reuters, eds. C Evans, R Krever, P Mellor, 2010) at Ch 18, [3.2.1], 455:

This is clearly an initiative that falls under the label of policy simpli fication, and is asomewhat surprising inclusion given the Governments clear instruction that theReview was to stay away from the GST. But it is encouraging that the Henry Reviewexplicitly acknowledges the operating burden of GST (in contrast to theGovernments misuse of the Tax Impact Statement associated with the introductionof the GST), and welcome that it is willing to countenance policy changes (though it

is clearly uncertain as to whether those changes will attract any simplificationbenefits). There are a variety of policy measures that can be employed to reduce the


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inherent complexity of the GST (see, for example Sandford, 1998, pp 129-139),although there is not much discussion of such possibilities in the AFTS Report.There is certainly scope to apply some of these measures to the Australian GST.

32 Returning to the first of the Asprey Committees requirements of simplicity, namely, for eachdollar raised, a small cost of official administration, the Commissioner of Taxations 2009-10

Annual Report (7 October 2010), would suggest that the cost of administering the GST is

anything but small. At 37 the Commissioner reported:

We collected cash (net) revenue of $253.2 billion in 2009-2010, a decrease of $11.3billion (4.3%) over 2008-2009.

And at 87 he reported:

In 2009-10, net GST cash collections were $44.1 billion, including net GSTcollected by the Australian Customs and Border Protection Service of $2.8 billion.This is 6.5% above the original Budget estimate of $41.3 billion.

Our administration costs for GST were slightly less than anticipated at $598.3million. This included processing and accounts $37.5 million), debt collection ($81.6million) and active compliance ($273.8 million). These administration costsrepresent interim results and are still subject to a special purpose audit by theAustralian National Audit Office.

33 Later in the Report under the heading Costof Collection, the Commissioner reported:The cost of collection measures the cost of collecting every $100 of cash. Thiscalculation measures the cost we incur against the cash collections, net of refundspaid.

Figure 6.1.1 shows the cost to collect $100. Costs changed from $0.85 in 2008-09 to$0.94 in 2009-10 for every $100 of cash collected, excluding goods and services taxadministration costs and collections. The increase is largely due to a decline incollections for 2009-10.


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34 These figures (in [32] and [33] above) demonstrate that in the 2009-10 year, the cost ofcollecting every $100 of GST revenue was $1.36 while the cost of collecting $100 of all other

revenue was $0.94. In other words, the cost of collecting the GST ($44.1 billion) was

approximately 144% of the cost of collecting all other revenue ($212 billion) administered by

the ATO. Even though the percentage is, by reference to the graph, undoubtedly falling, the

difference is huge; it clearly demonstrates that the tax is anything but a simple one.

35 So much is confirmed by the July 2011 Draft Report of the Productivity Commission on the Economic Structure and Performance of the Australian Retail Industry in the Chapter

headed: Appropriateness of current indirect tax arrangements where the Commission

considered lowering the low value threshold at which GST was attracted to imported goods

and declined to recommend that course. Its key points confirm the high cost of administering

the GST:

Key points

Australia has a low value threshold (LVT) of $1000 for most imports belowwhich it does not collect indirect taxes, impose charges, or require a full importdeclaration. Retailers consider this gives foreign online retailers a competitiveadvantage. For a number of reasons, the Commission considers that this is notthe main factor affecting the international competitiveness of Australianretailers.

In principle, as the GST is a broad based consumption tax, the LVT should bereduced to a low level to ensure tax neutrality. However, the principle ofefficient collection also applies in taxation. In general, where the costs ofcollecting a tax exceed the benefits of the revenue, that tax should not becollected. Where the recipient of a parcel is a business registered for GST, the

LVT has little effect on GST revenue since an input credit will be claimed.


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Approximately 55 million international parcels arrive in Australia under the$1000 threshold. While data are limited, the Commission estimates that withcurrent processes, without the low value threshold, about $578 million ofrevenue would be collected and over $2 billion of collection costs would beborne by businesses, consumers and government. These costs are a deadweightloss on the community.

Complexity

36 The other side of the coin from simplicity is complexity. That is the subject which causes megreatest concern as a judge of the Court principally charged with responsibility for resolving

disputations between taxpayers and the ATO in GST matters. By complexity I mean

complexity in the architecture or text of the legislation which provides uncertainty of

construction and, in consequence, uncertainty of application to a given set of facts. One

would have hoped, indeed been brave enough to expect, that with the introduction of a new

tax, the opportunity would have been taken by the policy makers from Treasury and the

administrators from the ATO to set up a standing committee to deal with the apparent

inability of the legislation as drafted, and as construed by the Courts in the early days of its

life, to provide that certainty. It is as if there is no interest from these sources in removing

complexity and promoting simplicity; or being more cynical, that it is not in the respective

interests of Treasury and the ATO as the creators and collectors of the GST revenue to

promote a playing field which is more certain because complexity, through uncertainty,

provides an in-built anti-avoidance mechanism.

37 No-one could dispute that the Australian tax system, nearly forty years on from Asprey, ishighly complex; far more complex than it was at that time. Not only in absolute terms, but

relative to comparable tax systems. The Henry Review Report is littered with references to

goals of simplifying the tax system. This is not new. As Evans and Tran-Nam point out at

[2.1], 441:

More than forty years ago Surrey and Brannon [Surrey, S and Brannon, G (1968),Simplification and Equity as Goals of Tax Policy, William and Mary Law Review9: 915-921 at 915] noted that simplification is the most widely quoted but leastwidely observed of the goals of tax policy. It has been used (and abused) as aprimary justification for tax reform over the last century. Typically it is seen as agood thing to say that one is in favour of tax simplification is tantamount tostating that one is in favour of good as opposed to evil. [Cohen, M, Stikeman, Hand Brown, R (1975), Tax Simplification, paper presented at the 27th TaxConference, Canadian Tax Foundation, Quebec, 10-12 November.] It is therefore

not surprising that there have been a number of reform initiatives in Australia overrecent decades with simplificationfor the reduction of complexity, as a key driver.


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38 Most academic writings in this area, both economic and legal, are concerned with what I callthe need for and the failure to provide simplification on a macro basis simplification of the

tax system as a wholerather than with individual taxes within that system. The former is

no doubt of laudable concern. But what I am concerned about is reform at a level which

drills down to scrutinise the architecture and text of the statute itself; in other words, micro

simplification. If that is undertaken on a comprehensive basis, then macro simplification

would follow.

39 In a concurrent paper (to that referred to in [31] above) published in (2010) 26 Australian TaxForum 245:Managing tax system complexity: Building bridges through pre-filled tax returns,

Chris Evans and Binh Tran-Nam looked at tax simplification going forward under three

headings of policy, statutory and procedural complexity.

40 Under tax policy simplification they wrote:From a tax policy perspective, simplification may be achieved by considering, forexample:

the choice of the tax base (e.g. narrow-based versus broad-based taxes; howincome is defined);

reducing tax rates;

the choice of the tax mix (direct versus indirect taxes);

the removal of taxes;

the choice of policy instruments (e.g. direct subsidy versus use of the taxsystem); and

whether or not to provide choices to taxpayers (e.g. choice of compulsorysuperannuation funds).

It is apparent that tax policy simplification in Australia (and elsewhere) is verydifficult because of:

the trade-off between simplicity and other socio-economic policy objectives;

the need to secure revenue in the face of population-ageing and globalisation;

powerful interest groups that can exert considerable influence onrepresentatives of the Government;

the growing complexity of the economy; and

the cumulative effects of past, incremental policies.


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41 As a result, they concluded that tax policy simplification has not been (and is most unlikely tobe) achieved in Australia. By way of an example, they referred to the replacement of the

narrow-based wholesale sales tax by the broad-based GST and wrote:

The most striking example is the Howard Governments ANTS reform. For anumber of reasons, including revenue security and perceived economic efficiency,the Howard Government replaced the narrow-based WST (and a few State taxes) bythe broad-based GST, which has also had the effect of changing the tax mix inAustralia to a greater reliance on indirect taxes. Despite the lip service to taxsimplicity (Costello 1998, p. 18), the effective tax complexity in Australia hasincreased as a result of the ANTS reform, simply because there are far more businesstaxpayers acting as tax collectors on the ATOs behalf under GST than under WST.In particular, under some plausible assumptions, (Tran-Nam (2004), p. 381)estimated that the annual operating costs (sum of recurrent and an annual equivalent

of start-up costs) of the GST in 2002-03 would be about AUD$3.1 billion while therepeal of the WST and some State taxes would have saved the Australian economyabout AUD$1.6 billion in the same year.

42 Under statutory simplification, the same authors wrote:From a statutory perspective, simplification may be achieved by:

replacing an existing tax law by a comparable and simpler tax law;

rewriting an existing tax law (in the linguistic and organisational sense); and

removing inoperative provisions of an existing tax law.

It is clear the replacement of the WST by the GST has not achieved any statutorysimplification. With its broad base, few exemptions and single rate, the GST is oftendescribed or perceived as a simpler tax than the WST. In fact, it is generally agreedamong tax lawyers that the GST legislation is more comprehensive and complex thanthe WST legislation. Since the WST commenced in 1930, a more sensiblecomparison would be between the WST legislation in 2000 and the GST legislationin 2070. This is not a promising comparison for the GST.

43 The complexity of the text of the statute was manifest in one of the early decisions of the FullFederal Court. InHP Mercantile Pty Limited v Commissioner of Taxation (2005) 143 FCR

553 the Court was required to address the construction and application of s 11-15(2)(a) of the

GST Act, specifically whether it denied input tax credits for what was conceded to be an

input taxed supply, albeit a supply that had already occurred, rather than a future supply. The

relevant text of the denial of such credits reads:

[T]o the extent that:

(a) the acquisition relates to making supplies that would be input taxed.


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Did this introduce a requirement and limitation, as contended by the applicant taxpayer,

that the denial only applied where the supply was yet to be made? The leading judgment

was given by Hill J, with whom Stone and Allsop JJ agreed. The definition of financial

supply has its own textual difficulties in that it includes counter intuitively, according

to Hill J, the acquisition of debts. In what has been regarded by many commentators,

including myself, as a paradigm of the application of modern principles of statutory

interpretation, Hill J, by reference to legislative policy, legislative context and authorised

extrinsic material, concluded that the denial of input tax credits by s 11-15(2)(a) operated

irrespective of when the input taxed supply was made provided the relevant relationship

between the acquisition and the supply was present, as it was in that case.

44 However, my point is that the whole tortuous exercise of statutory construction andapplication would not have been necessary had the text of the statute read:

(a) the acquisition relates to making supplies that [are] input taxed.

45 The very recent decision in Qantas Airways Limited v Commissioner of Taxation [2011]FCAFC 113 (1 September 2011) throws up an example of what I call an unnecessary

architectural complexity in respect of a fundamental concept, perhaps, the mostfundamental concept, to the construction and application of the GST Act, namely, the concept

of supply as enunciated in s 9-10. Moreover, it is not only a fundamental concept itself, but

fundamental to the construction of other fundamental concepts in which the word appears,

such as taxable supply as enunciated in s 9-5.

46 Section 9-10 relevantly provides:(1) Asupply is any form of supply whatsoever.

(2) Without limiting subsection (1)supplyincludes any of these:

(a) a supply of goods;(b) a supply of services;(c) a provision of advice or information;(d) a grant, assignment or surrender of *real property;(e) a creation, grant, transfer, assignment or surrender of any right;(f) a *financial supply;(g) an entry into, or release from, an obligation:

(i) to do anything; or(ii) to refrain from an act; or(iii) to tolerate an act or situation;


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(h) any combination of any two or more of the matters referred to inparagraphs (a) to (g).

(3) (3A)

(4) However, a supply does not include a supply of *money unless the money isprovided as *consideration for a supply that is a supply of money.

47 When Qantas was in the Administrative Appeals Tribunal, the Tribunal saw the architectureof s 9-10 as mandating that when one is seeking to identify the relevant supply or supplies,

one should first address the specific kinds of supply referred to in subs 9-10(2), and only then

address whether there was a supply within the ordinary meaning of the word under subs 9-

10(1). Its reason for saying this is difficult to understand, but at [13] of its reasons, it said:

The United Kingdom valued added tax (VAT) legislation does not define a supplyof services to include an obligation to provide them or a right to have them.Accordingly, the United Kingdom cases are concerned more with the ordinarymeaning of supply. In a UK context, it is the [the ordinary meaning of supply]which will determine the issue. However, in Australia, it seems appropriate first toaddress a precise statutory provision.

48 When the matter came up to the Full Court, the Court made the observation at [5] of itsreasons that the Tribunals approach seemed to be back to front. More importantly, for

present purposes, the Tri bunals approach undoubtedly contributed to the conclusion it

reached that there was not only a supply when the passenger made the reservation or booking

with Qantas but, in the circumstances of that case where there was no carriage because of

cancellation or failure to attend for carriage, and no entitlement to refund or a failure to claim

a refund, that was the taxable supply.

49 Even if the Tribunals approach to look first at s 9-10(2) is correct, one might have hoped thatthe Tribunal would have found the relevant supply in para (b) a supply of services and

come to the conclusion that, in the circumstances, that supply failed. Rather, the Tribunal

saw its task to find a kind of supply in s 9-10(2) that had not failed, and then found it in paras

(e) and (g). It seems to me that the architecture of s 9-10 contributed as much to the

Tribunals conclusion as did its reliance on the reasoning of the High Court in Commissioner

of Taxation v Reliance Carpet Co Pty Limited(2008) 236 CLR 342.


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50 The point that I seek to make is that the architecture of the statute in relation to thefundamental concept of supply contributes to uncertainty in the identification of the relevant

supply, namely, the taxable supply.

51 In my view, the architecture of s 9-10 could be changed to remove subss (2), (3) and (3A) intheir entirety without adversely impacting the revenue base that would remove all the

complexity and consequential uncertainty. If that is felt to be going too far because it

endangers the revenue base, the removal of subs (2), (3) and (3A) could be accompanied by

the following change to subs (1):

A supply is any kind of supply whatsoever and without limitation includes aprovision, creation, grant, transfer, assignment or surrender of anything as well as anact of entering into, or relief from, any obligation.

52 The decisions of the High Court in Reliance Carpetand Travelex Ltd v Commissioner ofTaxation (2010) 241 CLR 510, the alternative views in the courts below in each of those

cases and, in the latter case, in the High Court itself, illustrate, in a manifest way, the

complexity of the architecture and text of the relevant legislation. On the other hand, that

need not continue to subsist going forward. A standing committee of the kind referred to at

[36] above could be established to consider and deal, as appropriate, with such complexities

by recommending to Government changes in the legislation to ensure that the policy

underlying the design of the legislation is given effect to by the language of the legislation

and so reduce the number of cases where the courts are called on to construe and decipher the

complexity inherent in the words of the statute.

53 I have heard it said that it is difficult, indeed impossible, to identify complexity in thearchitecture or text of the statute before a particular issue arises between a taxpayer and the

ATO. I cannot agree. In many cases, architectural complexity is introduced into the final

articulation of legislation by reason of politically driven factors which call for carve-outs and

exemptions or exclusions from carve-outs. Textual complexity may follow but in an equal

number of cases it will be introduced at the drafting level and, I suspect, without regard to the

particular design feature of the underlying policy. Whatever the source or cause of the

complexity, it seems to me that it would be possible for a standing committee charged with

focussing on new tax legislation such as the GST Act is, to identify or be responsive to

submission on potential complexities prior to a particular issue between a taxpayer and the

ATO arising. Indeed, once it has arisen it is arguably too late because the taxpayer concerned


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should not have to be burdened with the consequences of failed articulation of policy design

if the modern principles of statutory interpretation cannot get the policy over the line.

54 Finally, as many of you will be aware, last Friday there was an application for special leaveto appeal to the High Court heard in Melbourne in the cases of Perfek and Lansell House.

Those cases concerned the issue of whether Italian mini ciabatta is a cracker or bread. If it is

a cracker, then it is subject to GST; if it is bread, it is GST-free. The fact that such an issue

could finish up being an issue agitated in the High Court of Australia makes a mockery of Mr

Costellos prophecy that the GST would simplify the Australian tax system by removing the

antiquated classification system of the wholesale sales tax which it replaced. I am conscious

that this conclusion is very much a function of the back down by the government of the day

to provide an exemption for what was called basic food. However, it is illustrative of a

complexity in the system of the GST, as distinct from the tax system itself, that provides

fertile ground for uncertainty. That kind of complexity can only be overcome by removal of

the carve-out or, in other cases, removal of exemptions from the carve-out.

55 What troubles me going forward is that the present Government continually refuses to allowthe GST to be the subject of further review. The mandate of the Henry Review was confined

to exclude review of the GST although, thankfully and positively, the Henry Review did

consider aspects of the GST as I have indicated above. However, the upcoming forum next

month has indicated that the GST is off limits and I have to say that from the point of view of

going forward, that is exceedingly disappointing. The GST should be at the forefront of any

such forum.

CONCLUSION

56 As I said at the outset, my assessment of the performance of the GST is only deserving of thedescription judicial by reference to my position and experience in having to deal with GST

disputation. Other observations I have made are sourced solely in my observance and

consideration of the views of others and I have acknowledged their source. However, my

own experience and observance of the views of others has led me to conclude that, at this

stage at least, the GST has failed to meet the generally accepted hallmarks of tax reform and

that while it may inherently exhibit advantages and benefits over the system which it

replaced, it falls short of any achievement in the cause of true tax reform. If only for that

reason, it should be on the agenda of the tax forum proposed for next month.

8 September 2011


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Documents

Justice Edmonds