Towards More Coherent Tax Laws
10 December 2005
Posted by: Author: Don Matthews
Towards More Coherent Tax Laws
Are there lessons to be learnt from Down Under?
It is common cause throughout the modern world that tax legislation should be simplified.This seems particularly true in South Africa where at times,legislation appears to have been drafted in a hurry, under pressure and where the drafting is often clumsy and obtuse.Often, this leads to unintended consequences of the legislation, requiring frequent amendments and adding to the complexity even more.
In December 2005 the Australian tax authority announced that an extensive overhaul of the tax law is to be implemented,starting with the scrapping of 2 135 pages of legislation that is no longer applicable.Their reform process, however, does not stop there.They are developing a new principle based approach to the design of tax law.In an article, Greg Pinder from the Tax Design Division of the Australian Government Treasury explains how the so called Coherent Principles approach to tax legislation works.This approach was announced as early as 1998 when the government made a commitment to use general principles in tax legislation, rather than detailed provisions.A principle is a statement of an intended outcome in a general field.It is a statement of the essence of all outcomes intended within such a field.
A principle is an operative legislative rule and specifies the outcome,rather than the mechanism that achieves it and expresses the outcome at the highest level rather than itemizing a list of outcomes for every conceivable case.
The principle should capture the intended outcomes in such a way that it helps the reader make sense and order of the law and is intuitive or obvious to someone who understands the law’s context.The coherent principles will be the operative rules for implementing the legislative purpose of the law and will describe the intended outcome clearly enough to produce workable results.A process called ‘unfolding’ is used to explain the principle’s application to particular situations.Where further guidance is necessary in particular situations, the Commissioner will publish rulings and interpretive material to explain how he thinks the principles apply.
The author goes on to explain the expected advantages of a principle-based approach.These are:
The principle-based approach is expected to create more certainty for taxpayers.In his opinion a rules-based law cannot cover every issue expressly and therefore creates uncertainty in those cases not dealt with specifically in the legislation.
Rules-based tax law needs to be amended when it does not cover everything it should or covers issues in an inappropriate way.This ties up resources and causes an administrative burden.Principle based provisions will describe what the law does, rather than how it does it.This can give the tax authority flexibility to design the appropriate administrative systems to minimise compliance burdens
It is expected that the principle-based law will have fewer tax ideas to be dealt with and that they will be less complex and more comprehensible.
By stating the purpose of the law, the courts will be able to interpret the law in accordance with Parliament’s intention.Australia is gradually phasing in the coherent principles.It should be of great interest to our tax legislators to monitor this process to see if South Africa could also implement this approach to simplify tax legislation.
Source: By Don Matthews (TaxTALK)