Australian Government Wrong Not To Introduce TVM Says Ralph

by Mary Swire, Tax-News.com, Hong Kong

14 July 2003

In a recent interview with BRW, the author of the Australian business tax reform program, John Ralph, complained that current tax law is again heading out of control, and criticised the government for failing to implement what he considers the key part of his report, namely the tax value method (TVM). He claims that this would dramatically simplify the tax system.

The Tax Value Method (TVM), which aims to calculate taxable income using the gain or loss in the value of a business's assets, including cash, was a proposal put forward in the 1999 Ralph Review of Business Taxation, but was pushed aside by the Government in favour of other, more pressing aspects of tax reform.

However, speaking to BRW, Ralph pointed to the two acts which principally govern tax law in Australia - the 1936 act and the 1997 act - and argued that they have become steadily more bloated over the last five years, now filling 10,000 pages compared to 4,000 in 1998. "The current system is an amalgam of statutory and judicial definitions and there is no structure to it. It has 37 regimes for writing off wasting assets. Under the TVM there will be only one. Full stop," Ralph told the national news service.

At present the government is attempting to amalgamate the two tax acts in order to simplify the system, but Ralph explained that he doubts that this can be done.

Whilst the TVM found a measure of support within the Treasury department and the Board of Taxation, the plan was shelved as it was considered too radical a change to the tax system, especially given ongoing reform in other areas of taxation such as the introduction of GST. "I liken it to asking everyone to drive on the right side of the road rather than the left," Board of Taxation chairman Dick Warburton observed of the proposed changes.

Other criticisms that were levelled at the alternative calculation method included the need for the identification of assets and liabilities not currently identified in all taxpayers' accounting records. Also, it was thought that there would be difficulties in explaining the net income formula, and risks to the integrity of the Australian tax base through opportunities for arbitrage around liabilities involving cross-border transactions. It was also thought highly likely that the TVM would add uncertainty and complexity to the country's international tax regime.

Ralph also expressed his disappointment with the government's decision to shelve another key aspect of his recommendations, which would have changed the tax treatment of family trusts so that they were taxed in the same way as companies. It is thought this would have raised $700 million a year in revenue, and closed of a large loophole which allowed income to be redirected to phantom taxpayers. "Even though you might not be able to capture all the income that, when it is distributed, should be taxed at 47% [for high-income earners], you would at least get it at 30% or 15%," Ralph suggested.

He added that the government should continue down the path of reform, and praised the proposals to change international tax legislation which will make life easier for Australian firms operating abroad, as well as attracting foreign firms to Australia.

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