Where's the Complexity in Tax Law?

Where’s the Complexity in Tax Law?

Rick Krever and Peter Mellor Monash Business School*

Centre for Business Taxation Said Business School University of Oxford

25 June, 2015

These are draft, and certainly very rough, notes containing preliminary thoughts on some data that may be relevant to the measurement of complexity in tax law.

Please do not circulate. Feel free to cite or quote, subject to the proviso that you are assuming ownership of all mistakes, errors or omissions in the paper.

* Our thanks to Sharon Nicholson, the creator of all graphics in this paper based on our data.

1. Subjective and Objective Indicators of Complexity

Measuring the cost of compliance with tax laws and identifying the causes of complexity that

generate this cost emerged as a leading academic enterprise in the closing decades of the 20th

century and the pace of studies shows no signs of slowing down.1 If the findings of the

deluge of complexity and compliance studies completed over the past decades were accurate

and politicians reacted appropriately, we could be well on the way to reducing complexity

and consequently reducing compliance costs. Observers have yet to witness collective sighs

of relief over the reduction of tax law complexity, however, suggesting one or both of these

prerequisites have failed to materialise.

A feature common to these studies is their reliance on subjective measurements of

complexity and compliance costs. One reason the studies may have had only a limited

impact on policy decision-making may be doubts about findings based entirely on subjective

analysis of taxpayers and their advisors. The basis for the studies prompted a question of

whether subjective views were the only source of data for analysing complexity or whether it

was possible to identify and then measure objective indicators of complexity.

The challenge involved four separate elements apart from the actual data collection and

analysis: defining “complexity”, the target of the study; identifying objective indicators that

could be used to indicate complexity; identifying yardsticks against which the indicators

could be measured; and classifying indicators into distinct issues within each tax.

The study concentrated on three tax systems: the income tax, the income tax, a “fringe

benefits tax, and the value added tax, called the goods and services tax or GST in Australia.

The most important tax in terms of both revenue and number of taxpayers is the income tax,

which applies to the income of both companies and individuals (Australia has a single law

and a single income tax system both companies and individuals). The second most important

is GST, adopted in 1999 and effective from mid-2000. The third is the fringe benefits tax, an

excise tax imposed on employers that remunerate employees with non-cash benefits.

1.1 What is complexity?

The definition of complexity adopted for this study derives from one of the first important

studies on complexity, a review prepared by a tax group within the American Bar

Association.2 The U.S. practitioners suggested the key indicator of complexity was

compliance cost – indeed, in their view the two were effectively synonymous. When the law

is complex, it is costly to comply with it. When it is not complex, compliance costs fall

away. Complexity thus equates to money.

Two types of complexity in tax law were identified. We describe these as certain complexity

and complex uncertainty. The former, to paraphrase the U.S. experts is found it cases where

a reasonably certain conclusion can be determined only after an expenditure that is excessive

in time and cost. The latter is found in cases where a reasonably certain conclusion cannot be

determined despite diligent and expert research.

1 2 This explanation draws directly from Sidney Roberts, Wilbur Friedman, Martin Ginsburg, Carter Louthan,

Donald Lubick, Milton Young and George Zeitlin, “A Report on Complexity and the Income Tax” (1972) 27(3)

Tax Law Review 325 at 327. The report had been prepared by the Committee on Tax Policy to the Executive

Committee of the Tax Section of the New York State Bar Association.

The study suggests there are a number of areas of complex certainty in the law. A feature

common to all is the length of the relevant legislation setting out the rules for that area. An

example is found in the debt-equity provisions with detailed provisions for characterising a

spectrum of instruments as the equivalent of shares or debts. Another is the “taxation of

financial arrangements” or “TOFA” rules that determine the time at which taxpayers should

recognise gains and losses on various types of financial investments such as complex bonds,

debentures and options. The foreign currency gain and loss recognition rules are equally

detailed.

The prime example, perhaps, is found in the controlled foreign company (CFC) regime

adopted as an integrity measure to prevent passive investment via tax havens. The CFC rules

attribute investment income derived by a company controlled by Australian residents and

located in a low tax jurisdiction to the Australian shareholders. Every aspect of the rules is

complex. Complicated tracing rules must be applied to find persons with indirect or direct

interests in the company exceeding the control threshold to determine if the company is a

CFC in the first place. It must then be decided if the CFC is deriving income in a low tax

jurisdiction and whether the income is attributable passive investment income or non-

attributable active business income. If the exact income cannot be ascertained, attributable

income must be calculated using deemed rates of return. Finally, complex tracking rules are

needed to ensure correct reconciliation when attributed income is eventually repatriated.

The CFC provisions and the rules for their interaction with other parts of the legislation are

drafted in convoluted language adopting multiple layers of definitions setting out inclusions

and exceptions, forming a truly byzantine maze. Understanding the system requires

dedicated specialisation. But once the myriad of measures is understood and applied, a

process that has been described in the context of similarly complex trust loss rules as

navigating a labyrinth,3 an answer can be found in almost all cases. By any reckoning it is

complex and costly to taxpayers to comply with and expensive and resource intensive for tax

administrators to administer.

The same could be said for the foreign investment fund (FIF) and transferor trust regimes that

operated in for a period alongside with the CFC rules. The FIF rules established a parallel

attribution regime, attributing to foreign investor income derived in low tax jurisdictions

through entities or arrangements such as mutual funds, investment trusts and investment

funds that fell outside the definition of a controlled foreign company either because of legal

form or falling short of the control rules. The “transferor trust” regime paralleled and to a

large extent overlapped with the FIF regime, extending to discretionary trusts outside the

scope of the FIF rules.

Importantly, complexity is not in the number of mechanical calculations required where this

can be automated. For example, a layperson might think that a multiple rate progressive tax

rate schedule looks more complex than a single rate flat tax. From a compliance perspective,

the two are the virtually the same, however. Once a person’s taxable income is known,

multiplying income by a single rate or looking on the table to find the tax payable on the

multiple rate scale involve similar time and effort.

3 Dale Pinto and Nicole Wilson-Rogers, "Navigating the Labyrinth: Evaluating Trust Loss Rules, FTEs and

IEEs" (2009) 38(4) Australian Tax Review 237.

Similarly, allowing an immediate deduction for the purchase of machinery or buildings looks

simpler than deducting the cost over a number of years by way of a depreciation regime, but

once the correct treatment is known – immediate deduction or deduction over several years –

there is at best a small difference in the cost of determining the correct deduction in any one

year. Complexity arises not with the calculation of the deduction but rather with

determination of whether the immediate deduction or deduction over time applies if the law

does not clearly define when the cost of an asset is subject to one treatment or the other. The

problem reflects a second corollary in complexity – there is no relationship between

complexity and the number of words in provisions or their technical nature.

For example, taxpayers can deduct immediately expenses incurred in the derivation of

assessable income, unless the expenses are “capital” in nature, in which case they can deduct

the expenses only if they can find a depreciation or similar provision that covers the expenses

in question.4 The provision prohibiting deductions for capital expenses provides no hints on

what might constitute a capital expense; the answer is to be found by weaving through

thousands of judicial precedents subject to continual change. Similarly, gains derived by

individual taxpayers are fully assessable if they exhibit characteristics of “ordinary income”

and possibly one-half exempt if they are considered capital gains that fall outside the meaning

of “ordinary income”. Once again, there is no definition of the key term – possibly the most

important in the income tax legislation – and taxpayers needing to characterise gains must

consult another set of thousands of ever changing judicial precedents

Objective indicators of the incidence of complex certainty are difficult to find. The law is

specific and certain but applying the law is time-consuming and costly. The work is

performed by expensive specialists and the only data to show the time and cost is private and

deliberately unavailable for scrutiny. In contrast, in the context of a self-assessment

environment in which taxpayers face potential penalties for making a wrong guess on the

application of uncertain law, there may be a number of objective indicators of complexity in

in its second form, complex uncertainty.

1.2 Complexity indicators

In the latter part of the 20th century, most of the developed world’s tax systems shifted from

revenue office assessment to self-assessment systems. The onus shifted to taxpayers to make

all decisions on how and when transactions should be characterised and to provide the

revenue authority only with the conclusions reached. Rather than revisiting each return and

each decision, revenue authorities use various risk assessment tools to identify taxpayers

most likely to have reached conclusions that differ from those the authorities would have

made and reopen these assessments. The penalty regime accompanying self-assessment

regimes provides the financial incentive for taxpayers facing complex uncertainty to incur

costs as needed to remove or reduce that uncertainty. As long as the cost of compliance is

less than the cost of penalties for non-compliance (discounted to reflect the risk of actually

being caught), taxpayers will be willing bear the compliance costs attributable to the

complexity. Some of the steps taken by taxpayers to overcome the uncertainty or pursue

positions where their view of an uncertain matter differs from that of the revenue authority

generate public available indicators. Complexity can be measured at the hip pocket –

whenever there is a cost to getting information needed for compliance, it is a cost of

complexity.

4 Income Tax Assessment Act 1997 (Cth.), s. 8-1.

Four complexity indicators were used in this study.

The first is private rulings. Taxpayers facing uncertainty can remove the risk of penalties by

determining the revenue authority’s interpretation of a transaction by way of a private ruling.

Although there is no charge for the ruling application, taxpayers rarely have the skills needed

to preparing and file the ruling request, let alone know there is a question that needs

answering, without input by a professional. Each ruling signifies a direct cost to a taxpayer

and is thus in theory a useful indicator of both the volume of complexity queries over all

taxes and, broken down by subject matter, the areas of complexity within each tax.

Unfortunately, precisely because private rulings are private, their utility as complexity

indicators is limited. The information that is available on private rulings does not cover the

full period surveyed in this study. The aggregate data on the rulings released by the revenue

authority does not break down information using the same categories of tax studied. Most

importantly, no details are available on the issues covered in the rulings. The data is thus

useful only for general comparisons between the taxes that are described in the overall

information released.

The second indicator is a collection of “interpretation decisions”, a category of mock or

sanitised (with taxpayer details removed) private rulings released on a public database by the

revenue authorities in a worthy example of administrative transparency. Most interpretative

decisions derive directly from actual rulings that are indicative of queries on an issue. A

smaller number are stylised mock-ups of rulings constructed on the basis of facts derived

from multiple ruling requests and similar questions arising on audit or directly through ATO

query channels.5 Questions are elevated to interpretative decision status based on frequency

of inquiry, with the aim of the program being to provide more general guidance on issues that

are clearly of interest to many taxpayers. The selection process thus identifies areas where

more taxpayers are incurring compliance costs seeking guidance on areas of uncertainty.

The third indicator is a “public ruling” released by the tax authority that sets out the

interpretation of tax laws in particular area that it will apply when making assessments.

There are two types of public rulings – rulings and determinations. Rulings are longer and

cover broader subject areas while determinations focus on specific issues. Both are “binding”

on the Australian Taxation Office meaning a taxpayer following the position taken in a ruling

when completing a self-assessment tax return can rely on the ruling as a shield against an

assessment and penalties in the event of later withdrawal of the ruling and adoption of a

different view by the Australian Taxation Office or if the position taken by the Office is

subsequently found by a court to be an incorrect interpretation of the law.6

Like private rulings, interpretation decisions and court decisions, public rulings are often

reactive responses to evidence of uncertainty faced by taxpayers. Public rulings are often

proactive responses to uncertainty. It is not unusual, for example, for the Australian Taxation

Office to issue public rulings soon after new legislation is adopted so it can set out its

interpretation upfront of unclear measures with the aim of assisting taxpayers to apply new or

changed rules. While public rulings do not require direct outlays by taxpayers, they are

5 The origin of the ATO ID system is reviewed in Wayne Gumley, “**” (2004) **(**) **. Gumley notes the

ATO IDs were adopted with the aim of greater transparency in the rulings system that, among other things,

followed a corruption scandal and critical report by the national auditor – see [ANAO report**]. 6 Taxation Administration Act 1953 (Cth.), Sch. 1, s. 357-60.

issued by the Commissioner to provide guidance in situations where the Commissioner

knows taxpayers (through their advisors) have ongoing compliance questions

The fourth indicator of complexity, appeals of assessments to tribunals and courts, can offer a

graded measurement of complexity. Litigation follows a process of query (including a

possible private ruling request), assessment and an initial “objection” to the assessment

reviewed internally within the revenue authority. The costs are, therefore, in addition to

compliance costs incurred on the path to appeal and may be substantially higher than the

costs preceding the litigation stage. An astute taxpayer would not proceed to the litigation

stage unless there were genuine uncertainties about the outcome – that is, the taxpayer has

some reason to believe the taxpayer’s view of ambiguous law might ultimately triumph over

the Australian Tax Office’s view of the rule. If the uncertainty were less and it appears the

Australian Tax Office’s view offered in a ruling or objection decision would likely prevail,

the taxpayer would not proceed with an appeal.

The initial appeal in itself can be used to identify areas of uncertainty greater than the level

resolved though preliminary steps. Additional graded measurements are possible if there are

a series of appeals. Faced with a tribunal or judicial decision, the Australian Tax Office or a

taxpayer would only appeal to a second body if the uncertainty were so great that an appeal

court might reverse the decision of the earlier court. The most uncertain, and consequently

most expensive to resolve, are issues that prompt even further appeals, the most complex

being those that make it all the way to the ultimate arbiter, the High Court of Australia. A

secondary measure of uncertainty on the way is the division of judicial decisions as a dispute

progresses through the courts. If there is unanimity among all the judges, there must be less

uncertainty as to the application of the law than if judges divide in the results while the

outcome remains the same through a series of appeals or if the result is reversed once or

twice on route to the final decision.

While the publicly available indicators may provide insights complexity across taxes and

within taxes, they will only reveal possible complex uncertainty, not certain complexity. The

cost of resolving certain complexity flow directly to the advisors working through the

technical rules; they leave no public indicia on the way. For example, of the 4150 income tax

interpretation decisions published in the fourteen years covered in this study, only nine dealt

with application of the CFC rules, an example of certain complexity noted earlier. Similarly

in the period from 2001 until 20** when the trust attribution regimes were in place, they

generated only 10 interpretation decision. Dealing with certain complexity may impose a

great cost on taxpayers, but it does not generate objective indicators that appear to be inherent

in attempts to resolve complex uncertainty.

1.2 Yardsticks and limitations

Indicators of complexity can only provide relative measurements between different taxes or

different if they are compared to a yardstick. Two have been used in this study to compare

complexity between taxes, the number of taxpayers and the tax revenue collected. That is,

the relative burden of complexity is measured in terms of the number of complexity

indicators per taxpayer in each tax and per dollar of revenue raised by each tax.

Figure 1 The relative number of taxpayers and revenue in each tax base

Source: Number of taxpayers from Australian Taxation Office, Taxation Statistics 2012-13 (2015), Tables 1, 34

and FBT detailed tables. Tax revenue from Australian Treasury, Budget 2015: Budget Paper No. 1 (2015),

Supplementary table 1. Representative average years have been used for the number of taxpayers and the tax

revenue over the period 2000-2014. The number of taxpayers for each tax is based on 2012-2013 data. Tax

revenues are based on 2010-2011 data.

Not surprisingly, the number of taxpayers in each tax type largely parallels the revenue

generated by the tax, though both the fringe benefits tax and GST produce more revenue per

taxpayer than the income tax. Income tax nevertheless overwhelms all other tax bases as a

source of revenue and in terms of the numbers of taxpayers. However, the fringe benefits tax

and GST generate more revenue per taxpayer than the income tax.

As is common in all market economies, across all tax bases, a small number of taxpayers

account for much of the revenue and tax authorities focus compliance efforts at a small

number of large taxpayers. The compliance burden, however, is spread across the taxpaying

community.

The income tax applies to all legal and natural persons deriving taxable income or entitled to

refundable tax credits. Its reach extends to all residents deriving income from any place in

the world and all non-residents who derive Australian-source income, a group that includes

all passive investors with Australian investments. The GST applies to a smaller pool, a

subset of businesses with turnovers above a registration threshold7 that make supplies in

Australia.

The fringe benefits tax has the smallest pool of taxpayers, employers who remunerate

employees with non-cash benefits. The tax is applied at the highest marginal rate and while

borne initially by employers is commonly assumed to be passed on to employees through

salary packaging arrangements which often explicitly account for fringe benefits tax in the

calculation of the total remuneration package. However, the concessional valuation of some

benefits, and in particular cars, makes the availability of benefits fiscally attractive well down

7 Currently $75,000 for businesses and $150,000 for non-profit organisations; see A New Tax System (Goods

and Services Tax) Act 1999, s 23-15 and A New Tax System (Goods and Services Tax) Regulations 1999, regs

23-15.01-02.

the income scale, even with the imposition of the highest marginal rate. This helps to explain

the relatively high revenue per taxpayer, though the overall impact of fringe benefits tax as a

revenue source remains small.

If interpretative decisions, public rulings and tribunal and court appeals of assessments are

effective proxies for measuring complexity and all taxes are equally complex, the relative

number of each might be consistent with the number of taxpayers or the amount of revenue

collected.8 The analysis could distort the effective complexity, however, by consolidating of

different classes of taxpayers. For example, the income tax might appear benign overall

because of the inclusion in the statistics of wage and salary earners, responsible for most of

the taxpayers and most of the revenue from the tax base. The overall statistics might mask

the fact that much smaller groups of taxpayers such as companies carrying out particular

types of transactions or companies in particular industries might account for a high

percentage of the overall indicators of complexity. The analysis is only capable of

identifying possible relative complexity on a macro scale.

1.3 Temporal compensation for the introduction of the GST

The period covered in this study, 2001-2014, commences 12 months after the introduction of

in Australia of the GST. One question to be resolved was whether the timing of the data

collection period would distort the findings. Taxpayers must have questions about even the

simplest of taxes when they are being applied for the same time, particularly a tax with no

similar precedent in the country. It could be expected that there will be a large number of

public rulings released initially to explain the tax administration’s interpretation of the law.

And in a self-assessment system in which incorrect conclusions can lead to significant

penalties, an initial flood of private ruling requests (and consequent interpretation decisions)

by taxpayers uncertain about the application of the law might be anticipated. These initial

questions might lead to a surge in litigation two or three years down the road as taxpayers test

the tax administration’s views. It might then be concluded that the study results are distorted

if these scenarios came to pass, capturing a short-term phenomenon rather than an accurate

long-term picture. On the other hand, it could be argued that the details within any bunching

provides an accurate picture of the relative areas of complexity within the GST, if not the

long-term position relative to other taxes.

With these considerations in mind, two data sets were used for the analysis of the relative

complexity of taxes for most indicators, one included the full data collected from 2001 until

2014 inclusive and the second excluding the data from the first five years which are the five

years after the year of introduction of the GST. One indicator, appeals of assessments,

suffers from an inherent lag time so cases reflecting introductory and teething issues with the

GST might appear until after the five year period. Acccordingly, a third data set based on the

most recent five years was also generated for this indicator.

8 Complexity indicators, particularly rulings, also apply to a number of smaller levies. These include the

petroleum resources rent tax, which applies only to a small number of significant taxpayers engaged in offshore

petroleum extraction as well as onshore oil and gas producers, a “luxury car tax”, which acts as a quasi-excise

tax to substitute for the high sales tax rate that applied to luxury cars before the multiple rate sales tax was

replaced with a single rate goods and services tax, and a “wine equalisation tax”, which serves a similar

function. There are also a number of rulings on tax rebate schemes that return excise taxes on selected fuels

used by agricultural and mining vehicles.

1.4 Complexity costs or compliance costs

An initial question was how broad the concept of the fiscal costs of tax complexity should

stretch. The target profile included a number of court cases that involved administrative

issues, particularly collection issues, rather than the determination of tax liability on taxable

income or consideration for a supply. For example, a number of cases concerned applications

by the Commissioner of Taxation for liquidation of companies with outstanding tax debts.

As these cases involved no question of complexity or uncertainty per se in the tax law, they

were removed from the second stage of analysis which categorised the types of uncertainty

that had prompted rulings or litigation.

Also excluded from the second stage of analysis was the small, but notable, number of cases

arising from alleged tax evasion. In these cases, taxpayers were not raising issues concerning

the calculation of taxable income or tax liability arising from questions of the application of

different measures in the law. Rather, the fundamental question was fairly simple – did the

taxpayer receive amounts that were not revealed when calculating taxable income. Cases

involving alleged evasion cover an array of litigation issues – claims of privilege over

documents obtained by the ATO, attempts to resist the Commissioner’s attempts to invoke

search and information gathering powers provided in the law, attempts to overturn

enforcement orders such as departure prohibitions, and so forth. It is assumed throughout the

process for the purpose of this litigation that the Commissioner’s interpretation of the law is

correct; there is no analysis of the substantive measures in the law that determine the

calculation of taxable income.

Not all cases considering the interpretation and application of tax law involve the

Commissioner of Taxation. A number of cases involving tax issues were litigated between

private persons. Some were purely contractual – for example, disputes as to whether the

quoted price was the GST-inclusive or exclusive price. These involve tax but the costs are

the result of bad bargaining, not complexity in the tax law. Some cases involve litigation

between private persons and other government agencies. An issue, for example, is whether

GST is part of the cost of facilities for determining other levies or obligations based on cost.9

Other private disputes do turn on uncertainty regarding the tax law. For example, there are a

number of cases in which the parties dispute whether a supply is a taxable supply and thus

whether the supplier can be compelled to issue a tax invoice to the buyer.10 In these cases,

the seller claims the supply is out of the scope of the GST and it is not required to issue an

invoice, allowing it to retain the full consideration received and denying the buyer an

entitlement to an input tax credit. The buyer, of course, interprets the law as imposing a GST

liability on the supply and a consequent entitlement to a tax invoice and input tax credit.

A variation of this problem arises on occasion in contract or tort civil litigation. The question

may be whether the plaintiff is entitled to input tax credits on replacement assets, with the

defendant claiming the plaintiff will be entitled and damages should thus be limited to a

GST-exclusive cost of damaged or destroyed property.11 Alternatively, the plaintiff may

9 See, for example, Australia Pacific LNG Pty Ltd & Ors v Building & Construction Industry (Portable Long

Service leave) Authority [2015] ICQ 013 concerning the base on which a coal seam project operator should be

obligated to pay a building and construction training levy, and a long service leave levy and a work health and

safety levy. 10 See, for example, CSR Ltd v. Hornsby Shire Council (2004) 57 ATR 201. 11 See, for example, Millington v Waste Wise Environmental Pty Ltd [2015] VSC 167 and Gagner Pty Ltd v

Canturi Corporation Pty Ltd [2009] NSWCA 413. One particularly problematic aspect of these cases is the

argue it will be liable to GST on damages so they should be grossed up to leave the plaintiff

with an appropriate after-tax compensation.12

There is no doubt that uncertainty in the tax law imposes real costs on taxpayers in cases

involving disputes over the application of tax law. They are, however, not compliance costs

in the sense of costs incurred directly in respect of meeting an obligation or seeking an

entitlement from the tax authority on the basis of the tax law. These disputes have, therefore,

been excluded from the database.

2. Relative Complexity of Tax Bases

2.1 Interpretative Decisions

The first objective indicator used as a proxy for complexity was interpretative decisions.

Derived from private ruling requests, interpretative decisions directly reflect levels of

taxpayer uncertainty and could be expected to be one of the most responsive indicators to the

impact of the introduction of GST immediately prior to the period studied. To isolate the

impact of transition and introduction uncertainty, a parallel analysis omitting the first five

years was prepared.

A comparison of number of decisions relative to the number of taxpayers in each base and the

relative revenue from each tax base confirms the fringe benefits tax is the most complex by

these measurements, while suggesting the GST is more complex than the income tax,

although by a smaller margin once the introductory uncertainty is removed.

Figure 2a Number of taxpayers / interpretative decisions, 2001-2014


and FBT detailed tables . Interpretative decisions calculated by the authors from Australian Taxation Office

fact that a court deciding on tax consequences and entitlement to input tax credits is not the court empowered to

hear tax appeals and the decision is not binding on the Commissioner of Taxation who is not a party to the case. 12 See, for example, Peet Ltd v. Richmond [2009] VSC 585.

database accessed through www.ato.gov.au. A representative average year (2012-13) has been used for the

number of taxpayers over the period 2001-2014. Interpretative decisions are all decisions from 2001 to 2014.

Figure 2b Number of taxpayers / interpretative decisions, 2006-2014


and FBT detailed tables . Interpretative decisions calculated by the authors from Australian Taxation Office



The results change again if the first decade of the GST is excluded from the analysis.

Figure 2c Number of taxpayers / interpretative decisions, 2010-2014


and FBT detailed tables. Interpretative decisions calculated by the authors from Australian Taxation Office



http://www.ato.gov.au/



Based on the full period surveyed or any subset of it, measured in terms of interpretative

decisions per taxpayer, the fringe benefits tax is the most complex tax in Australia. It is

revealed as particularly complex if the initial surge of GST decisions are removed from the

study. Over the full period, the GST was also complex relative to the income tax. It remains

more complex, but less so, once the initial period is excluded.

The results for the entire period are not greatly different compared to the relative revenue for

the taxes over the entire period.

Figure 3a Revenue / interpretative decisions, 2001-2014

Source: Tax revenue from Australian Treasury, Budget 2015: Budget Paper No. 1 (2015), Supplementary table

1. Interpretative decisions calculated by the authors from Australian Taxation Office database accessed through

www.ato.gov.au. A representative average year (2010-11) has been used for the relative tax revenues over the

period 2001-2014. Interpretative decisions are all decisions from 2001 to 2014.

If the initial years of the GST are excluded, the fringe benefits tax remains the most complex

tax (and is relatively even more complex than the others) while the GST falls behind the

income tax in terms of complexity when compared to revenue.


Figure 3b Revenue / interpretative decisions, 2006-2014





This remains true if the first decade of the GST is excluded.

Figure 3c Revenue / interpretative decisions, 2010-2014





The relative complexity of the fringe benefits tax and continuing relative greater complexity

of GST over income tax are even more striking when viewed in terms of the revenue

collected for each decision or the number of decisions issued for each dollar of revenue. In



the former case, smaller the revenue per decision, the greater the complexity. In the latter

case, the greater the number of decisions for a given amount of revenue, the greater the

complexity of the tax.

Figure 4 Interpretative decisions per $100m revenue, 2001-2014


1; Australian Treasury, Pocket Guide to the Australian Taxation System, Table C3 (2000-01 to 2004-05 years).

Interpretative decisions calculated by the authors from Australian Taxation Office database accessed through

www.ato.gov.au.

Figure 5 $m revenue per interpretative decision, 2001-2014


1; Australian Treasury, Pocket Guide to the Australian Taxation System, Table C3 (2000-01 to 2004-05 years).

Interpretative decisions calculated by the authors from Australian Taxation Office database accessed through

www.ato.gov.au.



The low level of decisions in recent years leads to some volatility in this measurement. For

example, the small number of GST decisions in 2011 and particularly in 2014 in particular

greatly inflates the revenue per decision in those years.

The total number of interpretative decisions issued annually fell in the second half of the

period studied. While the ATO noted the decrease in its annual reports,13 it offers no direct

explanation for the phenomenon. Clearly the initial surge of GST decisions can be traced to

the introduction of GST in 2000 and the many questions that inevitably arise early in life of a

new tax. Also, the interpretative decision database was put online from 2001 and

interpretative decisions in the early years included issues raised in the period prior to the first

postings. Another factor may be the changing nature of rulings. It is the ATO’s view that

ruling requests deal with increasingly complex issues partly attributable to “an increasing

number of interactions with large-market taxpayers and their agents under [the ATO’s] early

engagement model.14 These rulings tend to deal with fact and transaction specific issues that

are not easily translated into more general interpretative decisions of value to a wider

community of taxpayers. Finally, the fall might be attributable to the growth in information

provided by the ATO on line and via industry groups. Prompted in part by criticism by the

Commonwealth Ombudsman15 and directions by the Inspector-General of Taxation to

address what that office labelled the “legislative imperative to minimise uncertainty”,16 the

ATO has greatly expanded its direct information provision programs.17

2.2 Public Rulings

Looking at the entire survey period, including the effect of the introduction of the GST, the

fringe benefits tax is particularly complex when measured in terms of the number of public

rulings relative to the number of taxpayers. The GST, in turn, appears much more complex

than the income tax.

13 See, for example, Australian Taxation Office, Annual Report 2013-14 (2015), at 36, and Australian Taxation

Office, Annual Report 2012-13 (2014), at 28. 14 See Australian Taxation Office, Annual Report 2012-13 (2014), at 28. 15 See Commonwealth Ombudsman, Annual Report 2011-2012 (2012), at 72; see generally also the

Commonwealth Ombudsman’s submission to the Australian Parliament Joint Committee of Public Accounts

and Audit enquiry into tax administration, discussed in Joint Committee of Public Accounts and Audit, Report

410: Tax Administration (June 2008), at 49. 16 Inspector-General of Taxation, Review into improving the self assessment system (Canberra, August 2012), at

36. 17 Australian Taxation Office, Annual Report 2013-14 (2015), at 36.

Figure 6a Number of taxpayers / public rulings, 2001-2014


and FBT detailed tables. Public rulings calculated by the authors from Australian Taxation Office database

accessed through www.ato.gov.au. A representative average year (2012-13) has been used for the number of

taxpayers over the period 2001-2014. Public rulings based on 2001, 2002, 2011-2014 as representative years.

The results are not greatly different if the first decade of the GST is removed, although the

fringe benefits tax appears even more complex.

Figure 6b Number of taxpayers / public rulings, 2011-2014


and FBT detailed tables. Public rulings calculated by the authors from Australian Taxation Office database

accessed through www.ato.gov.au. A representative average year (2012-13) has been used for the number of

taxpayers over the period 2001-2014. Public rulings based on 2011-2014 as representative years.



The fringe benefits tax remains the most complex if measured in terms of public rulings

relative to revenue. The GST, by this measurement, remains more complex than the income

tax.

Figure 7a Revenue / public rulings, 2001-2014


1. Public rulings calculated by the authors from Australian Taxation Office database accessed through


period 2001-2014. Public rulings based on 2001, 2002, 2011-2014 as representative years.

The GST continues to look complex in terms of this measurement even if the first decade

after its introduction is excluded from the data.

Figure 7b Revenue / public rulings, 2011-2014


1. Public rulings calculated by the authors from Australian Taxation Office database accessed through



period 2001-2014. Public rulings based on 2011-2014 as representative years.

Measured in terms of the public ruling indicator, fringe benefits tax is a stand out in terms of

complexity, dwarfing the other taxes. GST is less complex, but still substantially more

complex than income tax, particularly in terms of the number of taxpayers. The public

rulings yardstick interacts with the others in several ways. To the extent the Australian

Taxation Office has correctly anticipated areas of complexity and provided taxpayers with a

safe harbour path through the complexity, it should reduce ruling requests that lead to

interpretation decisions and litigation. If public rulings are higher in the same areas as

interpretative decisions and appeals, those areas are likely to be severely complex. However,

once again the fringe benefits tax appears to be the most complex tax base in Australia. The

GST is also complex by this measurement, particularly in respect of the number of taxpayers

and the relative position does not change with the exclusion of introduction and transitional

rulings.

2.3 Appeals

The first step of appealing a tax assessment is to raise a formal “objection” to the assessment

to be considered within the Australian Taxation Office. Unsuccessful taxpayers can then

appeal to a tribunal or court. Appeals to either body involve upfront costs and are unlikely to

be undertaken unless the taxpayer believes the issue is genuinely open to alternative

interpretations and an interpretation inconsistent with the Australian Taxation Office’s view

might prevail when considered by an adjudicator outside that Office. Appeals thus serve as a

very useful proxy for uncertainty. An analysis of appeals reveals the same pattern as

interpretative decisions and public rulings – the fringe benefits tax is the most complex,

followed by the GST measured in terms of appeals relative to the number of taxpayers in

each group.

Figure 8a Number of taxpayers / appeals of assessments, 2001-2014



and FBT detailed tables. Appeals of assessments calculated by the authors from Australian Tax Cases reports,

2001-2014. A representative average year (2012-13) has been used for the number of taxpayers over the period

2001-2014.

The figures for GST over the full period might understate the complexity of the GST because

it includes a period when it was impossible for many disagreements over interpretation of the

law to reach a resolution through the court system. Moving from an assessment, audit or

investigation, reassessment by the tax authority, objection to the tax authority’s reassessment,

hearing date in court and release of the court decision is a long process. Appeals resulting

from disputes in the first years of the GST will be reflected in court decisions issued some

time later. If the first five years of the GST are excluded from the analysis so the focus is on

the period after disagreements start to flow into the appeal system, the relative complexity of

the GST increases using the appeals to number of taxpayers yardstick.

Figure 8b Number of taxpayers / appeals of assessments, 2006-2014




2001-2014.

It could be argued, however, that in the case of appeals the data from both the first five years

after introduction of the tax and the next four years are distorting. The absence of decisions

over the first period could be offset by a surge of cases in the following years as all disputes

resulting from initial implementation and transition confusion have worked their way through

the assessment, objection and appeal process and generated judicial decision. However,

removing both periods from the analysis shows the GST to be even more complex.

Figure 8c Number of taxpayers / appeals of assessments, 2010-2014




2001-2014.

The results from a comparison of appeals to revenue yield a different result over the full

period. While the fringe benefits tax remains the most complex, the GST appears less

complex than the income tax using this measurement.

Figure 9a Revenue / appeals of assessments, 2001-2014

Source: Revenue from Australian Treasury, Budget 2015: Budget Paper No. 1 (2015), Supplementary table 1.

Appeals of assessments calculated by the authors from Australian Tax Cases reports, 2001-2014. A

representative average year (2010-11) has been used for the relative tax revenues over the period 2001-2014.

Again, however, the results are distorted by the inclusion of years when GST appeal

decisions could not have been generated. If the initial five years of the GST are excluded

from the analysis so the focus is on the period after disagreements start to flow into the

appeal system, GST assumes a position consistent with other measurements as the second

most complex tax.

Figure 9b Revenue / appeals of assessments, 2006-2014




This relative complexity is maintained – indeed grows – if both the initial years and the

period in which initial disputes would be resolved are excluded from the analysis.

Figure 9c Revenue / appeals of assessments, 2010-2014




Both the fringe benefits tax and GST appear complex using this index in respect of the

number of taxpayers and revenue, although GST is slightly less complex than income tax

when measured in terms of revenue over a timeframe including initial years when appeals

would not have been resolved. Once this period is removed, the GST is restored to its

position as the second most complex tax.

Litigation is even more likely to be a useful barometer of uncertainty in the case of appeals

where taxpayers or the ATO believe a higher level of court might adopt an interpretation

opposite to that adopted at first instance. Costs escalate up the appeal chain and litigants are

only likely to pursue higher appeals where the uncertainty remains strong enough to indicate

a possibility, if not probability of success.

Both the fringe benefits tax and GST retain their relative positions of complexity when cases

involving further appeals of decisions are compared to the number of taxpayers.

Figure 10 Number of taxpayers / higher level appeals, 2001-2014


and FBT detailed tables. Higher level appeals of assessments calculated by the authors from Australian Tax

Cases reports, 2001-2014. A representative average year (2012-13) has been used for the number of taxpayers

over the period 2001-2014.

If the further appeals indicator measured against revenue, however, the complexity of the

GST relative to the income tax falls.

Figure 11 Revenue / higher level appeals, 2001-2014


Higher level appeals of assessments calculated by the authors from Australian Tax Cases reports, 2001-2014. A


Initial appeals of assessments, particularly to a tribunal, cost relatively less than higher level

appeals. This fact, combined with a possibly jaundiced view by some taxpayers that the

Australian Taxation Office’s interpretation of uncertain law might not be not fully

independent, could lead to the assumption that taxpayers would be willing to litigate

decisions in areas of different levels of complexity initially and on appeal. More specifically,

they might be more willing to gamble on reversing decisions in more settled areas on initial

appeals than on higher level appeals. This turned out not to be the case, however. There is a

remarkable consistency in the subject matter of assessments subject to an initial appeal and

first instance decisions subject to further appeal.

This consistency continues in terms of the subject matters of appeals that reverse earlier

decisions. The application of the tax law must be truly unsettled if a court or tribunal has

reached a decision on the meaning and application of the law and that ruling is reversed by a

higher level court. The results largely mirror those found in other measurements of

complexity, however.

Figure 12 Number of taxpayers / decisions overturned on subsequent appeal, 2001-2014


and FBT detailed tables. Decisions overturned on higher appeal calculated by the authors from Australian Tax

Cases reports, 2001-2014. A representative average year (2012-13) has been used for the number of taxpayers

over the period 2001-2014.

Figure 13 Revenue / decisions overturned on subsequent appeal, 2001-2014


Decisions overturned on higher appeal calculated by the authors from Australian Tax Cases reports, 2001-2014.

A representative average year (2010-11) has been used for the relative tax revenues over the period 2001-2014.

Once again, both the fringe benefits tax and GST appear complex using this index in respect

of the number of taxpayers and revenue, although GST is slightly less complex than income

tax when measured in terms of revenue

2.4 The Results

By reference to any measurement, the fringe benefits tax is the most complex tax in

Australia. This result was unexpected. The initial expectation was based on an assumption

regarding the probable impact on uncertainty and hence complexity of the “principle-based”

construction of the fringe benefits tax.

The law itself is a model of how not to draft readable tax law. A reader has to plough

through 65 sections before hitting the charging provision and finally discovering what is

actually subject to the tax. Almost all the terms in the charging section are defined and most

of the definitions contain terms that are also defined. As a result, an understanding of the

charging section requires a thorough reading of the definition provision 71 sections later in

the law.

Yet despite its dreadful drafting in terms of layout, the fringe benefits tax legislation is a

model of principle-based drafting, standing in stark contrast to the income tax law which

applies to a base constructed entirely on piecemeal inclusion and deduction provisions with

no principled fall-back system applying outside the individual inclusion and deduction

measures. The fringe benefits tax, in contrast, is structured as a comprehensive levy with a

universal fall-back position – unless explicitly excluded, the market value of all benefits of

any kind apart from salary or wages provided by past, present or future employers to past,

present or future employees directly or indirectly by way of arrangements with other

providers is subject to tax. Tax expenditures by way of reduced valuations or exemptions are

explicitly carved out with statutory definitions. There is no room for implicit tax

expenditures arising by way of lacunae between inclusion measures as occurs so often with

the income tax.18

The more detailed examination of the areas of uncertainty within each tax, set out in the

following section to this paper, provide some insights to the reason for the fringe benefits tax.

The problem, it seems, may not be with the tax law but rather with the handouts delivered

through the law – an array of concessions embedded in the fringe benefits tax.

This seems not to be the case with the GST. Most indicators noted above show the GST to be

more complex than the income tax. Only in terms of public rulings and appeals relative to

revenue over the entire survey period and interpretative decisions in the later periods does the

GST appear less complex than the income tax. In all measurements against the number of

taxpayers, it is more complex. The starting point for an analysis of the tax was the

assumption that a direct nexus between complexity and concessions in the tax. From a macro

perspective, the impact of concessions on the effectiveness of the tax is one of the most

striking features of Australia’s GST, particularly given its origins in the modern VAT, quite

deliberately rejecting the dual rate, multiple exemption traditional VAT model.

More insights as to the relative ranking of the taxes in terms of complexity might be derived

from the relative areas of complexity within each tax, explored in the next three sections.

18 Richard Krever, “Analysing Implicit Tax Expenditures” (2011) 35(2) Melbourne University Law Review 426

at 445-448.

3. What is complex in the GST?

3.1 Initial assumptions

A survey of complexity across taxes showed GST to be less complex than the fringe benefits

tax but, in most measurements, more complex than income tax. It was assumed initially that

the complexity might be tied to the significant concessions in the GST. The impact of those

concessions on the tax base is revealed in the OECD’s “VAT revenue ratio”, a measurement

comparable to the c-efficiency measurement used by the IMF, measuring the percentage of

the VAT collection possible if the VAT were applied effectively to the full potential base that

is actually collected. Australia falls well below the OECD average in terms of effective tax

collections. The tax administration is among the best performing in the OECD,19 however,

and the GST the revenue loss is not attributable to a significant evasion or scheme fraud. It

is, rather, attributable to the remarkably generous array of concessions found in the law. As

the next section shows, however, these seem not to be the main source of complexity in that

tax.

Figure 14 VAT/GST Revenue ratio 2012

Source: OECD, Consumption Tax Trends 2014 (Paris, OECD), p. 95.

3.2 Distinguishing concessional and non-concessional features

Unlike the income tax or fringe benefits tax subject to annual tax returns, for most taxpayers

GST returns are due every quarter or every month and GST liability is calculated at the time

of each sale. For retailers in particular, the process is largely automated, built into point of

sale registers. Tax applicable to most business-to-business supplies is completely recovered

by the purchaser, greatly reducing the possibility of inconsistent characterisation of

transactions by the parties at either side of the supply and final consumers who finally bear

the tax are not in the position to request rulings regarding the supplier’s liability to remit tax.

There are, nevertheless a large number of objective indicators of uncertainty – in terms of

interpretative decisions, public rulings and appeals, making the GST the second most

19 See sources cited in Michael D'Ascenzo, " Pathways for Tax Policy and Administration – Institutions and

Simplicity: An Australian Perspective", fn. 50 in Chris Evans, Richard Krever and Peter Mellor (eds.), Tax

Simplification (Kluwer, 2015), in press.

complex tax after fringe benefits tax. It is true that the figures, at least with respect to

interpretative decisions and public rulings, are exaggerated by the fact that the tax was a new

tax, effective from 1 July 2000, and the introduction led to a flood of both queries by

taxpayers and proactive information publications by tax authorities. However, even if the

initial years are excluded from data analysis, the tax remains a relative complex tax.

Whatever merits it may have in policy terms, as it is structured in Australia, the tax is not a

panacea for complexity.

As noted in part 2 of this paper, the initial issue confronted in an analysis of complexity

issues and the GST is the classification of rules that suspend tax liability for transactions such

as such as intra-group supplies and supplies of going concerns. In terms of pure VAT

processes, the suspension is concessional by allowing taxpayers to avoid the cash flow

implications of first paying GST and then recovering it. However, in terms of higher level

VAT goals – the taxation of final consumption and elimination of tax on business to business

inputs to final consumption, the measures are structural, and not concessional. The analysis

in this study has adopted the second benchmark and accordingly treated measures consistent

with the consumption tax objectives of the GST as structural features.

More troublesome is the characterisation of financial supplies and residential real property

supplies. Conceptually, “financial supplies” encompasses three distinct groups of supplies.

The first is the supply of loan intermediary services (the role played by credit unions and

banks matching lenders and borrowers). The fee for this intermediary service is charged

indirectly via the spread of interest paid to deposits and charged to borrowers. The second

type of financial service is the pooling service offered by insurers and gambling proprietors

that pool contributions from members and gamblers, respectively, and distribute them to

losers and winners, respectively. The fee for pooling services is the difference between the

amount collected (and any income derived from investment of insurance premiums or bets)

and the amount distributed. The third type of financial supply is the supply of financial

instruments – rights of ownerships in companies, trusts, partnerships and debt arrangements.

The Australian GST applies fully to financial gambling and insurance pooling services, apart

from the provision of life insurance, and registered business customers are able to recover

fully the GST imposed on the latter type of service (there are no registered enterprises that

gamble as a business). Both loan intermediary supplies and supplies of financial instruments

are exempt or input taxed supplies , meaning no tax is applied to the value added by the

supplier. No input tax credits are available to users of services that supply financial

instruments. A limited recovery of GST on some inputs required to provide financial loan

intermediary service is to banks and similar intermediaries through a “reduced input tax

credit” regime available.

The result is a combination of undertaxation and overtaxation of supplies of loan

intermediary services and supplies of financial instruments. Since users of loan intermediary

services are not able to claim input tax credits in respect of the services they acquire, all

registered business borrowers are overtaxed. So, too, in theory, are unregistered borrowers

using loans for investment purposes. In a pure consumption tax, they would bear no tax

burden on acquisitions for savings or investment. However, in a conventional VAT they

would not be able to register as the investments are not a business and they would be

overtaxed. At the same time, unregistered persons borrowing for personal consumption

purposes are undertaxed, with no tax imposed on the value added by the loan service

provider. The depositors who provided the funds they are borrowing, both registered

businesses and unregistered savers, are overtaxed. Once again, however, while the

unregistered depositors should in theory bear no tax on saving, in a conventional VAT they

are not able to register and would incur this tax burden.

The Australian position is consistent with prevailing international norms. The scope of

“financial supplies” varies significantly across the globe but with very few exceptions,20 loan

intermediary supplies and supplies of financial instruments are treated as exempt supplies.

This, combined with the fact that there is both over- and undertaxation under the current

Australian treatment, has led to the classification of for complexity comparison purposes as a

structural feature, not a concessional feature.

The rules for supply of residential real property have also been treated as a structural feature.

Australia treats residential real property similarly to used goods. The VAT subjects the first

sale of goods other than real property by a registered business to VAT even though the actual

consumption takes place over the life of the goods – the initial cost of goods equals the

present value of consumption over the life of the goods and tax imposed on the initial sale

thus equals the present value of tax on all future consumption. Subsequent sales of used

goods by unregistered persons can be ignored. Since the value of used goods is based on the

initial VAT-inclusive purchase price, the appropriate tax outcomes fall on all parties if initial

sales by registered vendors are subsequent sales are ignored. The government has the correct

present value of tax revenue upfront. The initial buyer paid the tax for all consumption of the

goods but recovers the tax on the unused consumption when the goods are resold. The

second and subsequent buyers effectively reimburse the first owner for the additional tax paid

and all persons end up collecting or paying an appropriate amount.

Subject to some modifications and very generous transition rules (transition margin scheme

exempts from tax all value accrued to the date the tax started), the Australian residential real

property rules parallel the second hand goods rules. It is not entirely clear whether the

general rule is concessional or not. If residential real property depreciated in the same way as

limited life property, the parallel treatment would be apt. It does not, however. In most cases

in Australia, particularly in some capital cities, residential real property is likely to appreciate,

often due to factors that would have been difficult to anticipate. To the extent the full later

appreciation was not factored into the initial sale price, the one-off taxation of first sales will

not capture all future consumption and the used goods treatment for residential real property

becomes concessional. Also uncertain is the treatment of rental supplies as exempt supplies.

While landlords undoubtedly provide some services in addition to occupation of the

premises, the principal supply is the occupation and in theory the value of this consumption

benefit was captured in the initial sale price.

Once again, the concessional or non-concessional nature of the rule is uncertain. The

treatment of residential property supplies as exempt supplies is most common, however, and

for this reason, along with the uncertainty regarding its concessional or non-concessional

nature, the real property provisions have been treated as non-concessional structural features

of the GST in this analysis.

The most important group of non-concessional issues are those concerning the core structural

features of a VAT such as “supply”, “consideration” and “enterprise”. Other features

20 Israel imposes VAT on intermediary services but provides customers with no input tax credits. Argentina and

China impose a tax on interest rather than intermediary services. New Zealand and Singapore have actual or de

facto zero rating schemes for loans to registered business borrowers.

fundamental to the application of a VAT included in the core structural features group relate

to registration, adjustment events, the identification of the supplier and the operation of

transitional rules necessary for the transition of predecessor taxes to a VAT.

Two sets of issues that modify the core rules in particular circumstances are also included din

this group. These are issues related to the use of “deposits” and “vouchers”. In the

benchmark VAT, a supplier is liable for tax when consideration is received or entitlement to

payment arises (for example, on delivery of an invoice). If consideration later changes or is

returned to the customer on cancellation of the supply, tax liabilities and credit entitlements

are fixed by way of adjustment events. The basic rule would yield peculiar or

counterproductive results in a small number of transactions and accordingly many VATs,

including the Australian GST include a modified core rule for these cases.

The first problematic situation arises with security deposits that are returned to the

“customer” in the ordinary course of events. An example is the deposit to a hotel for an

umbrella when the guest discovers it is pouring rain and he has arrived without an umbrella.

While the parties may label the payment a “security deposit” to ensure the return of the

umbrella, in reality the guest has bought the umbrella – there is no compulsion to return it –

and obtains a refund when the umbrella is returned. Under the basic VAT rules, the hotel

would be liable for VAT when it received consideration and supplied the umbrella and there

would be a corresponding adjustment event when the umbrella and “deposit” returned. In the

normal course of events, the guest will return the umbrella the same day and the hotel could

just consider the arrangement a wash, not recording it in the hotel’s accounts. If, however,

the guest returns after midnight and a new tax period has begun, under the basic VAT rules,

there would be a tax liability in the first period and an offsetting credit in the second.

Tax designers concede the VAT rules lead to an absurd result in this situation, imposing a

host of costs on a business for no net revenue. For this reason, it is thus common for VAT

laws to contain an exception to the general supply time attribution rules for security deposits.

The exception applies when a customer provides consideration called a security deposit and

both the supplier and the customer understand the amount will be returned to the customer

when the security is no longer required. In this case, the exceptional rule provides for delay

of recognition of the amount payments until it becomes certain that they will not be returned

to the customer.

The second problematic transaction arises in the case of acquisitions of entitlements to goods

or services that are evidenced by a document labelled a “voucher”. Under the normal VAT

rules, a supplier is liable for VAT on the receipt of payment for goods or services, even if the

delivery is to be made in the future. Normally the customer receives a document providing

evidence of payment and entitlement to the future service – a public transport ticket that can

be redeemed on board a bus for transport, a movie ticket that can be redeemed to the usher

for admission to the cinema, a redemption code card that can be applied to phone and data

usage on a pre-paid telephone account, and so forth. As long as both parties know what will

be supplied on the final delivery, the supplier is able to accurately calculate the VAT due on

the supply.

Difficulties arise, however, where the supplier has provided an entitlement to future delivery

but at the time of sale, it is not entirely clear what will be delivered. A common example is

the gift voucher that can be redeemed for any goods or services of the holder’s choice. There

is no problem if the supplier provides one type of product only – a bookshop, music

downloads site, clothing shop, etc. But if the supplier sells a wide range of items that bear

different VAT rates or are characterized differently for VAT purposes – standard rate,

reduced rate, exempt, or zero-rated – and the supplier does not know what type of supply will

be provided when the voucher or entitlement to delivery is used, it is impossible to determine

the VAT due on the supply that has already been paid for.

Once again, many VAT laws provide an exception to the general rule for this type of

payment as well. If the supplier provides a “voucher” entitling the customer to delivery of

goods or services and at the time of payment it is not known what VAT rate will apply to the

supply,

The Australian rules for security deposits and for vouchers evidencing entitlement to supplies

with unknown tax consequences are treated as part of the core consideration rules in this

study.

Another group of non-concessional issues arise from the implementation or operation of the

VAT once the core features have been satisfied, described in this study as “operational”

issues. These include issues relating to rules which zero-rate supplies of going concerns and

supplies of farmland. As noted in part 2 of this paper, zero-rating of supplies of going

concerns and supplies of farmland might be regarded as concessional because it imposes no

cash flow penalty on business-to-business supplies of expensive capital items, while the cash

flow penalty would be an inherent feature of the output tax and input tax credit structure of

the VAT applied to capital acquisitions. However, given their complete alignment with one

of the primary objectives of the VAT, removing tax from business-to-business transactions,

these rules have been treated as non-concessional operational aspects of the GST.

A third non-taxation situation treated as an operational issue is found in the grouping rules

that ignore the legal separation of parts of one common multi-element enterprise. In a strict

application of the orthodox VAT, all intra-group supplies would be give rise to tax liabilities

and contemporaneous input tax credits. The grouping rules achieve the same net result in a

much simpler fashion.

Also included in operational aspects of the GST are questions related to the zero rating of

exports. While zero-rating of exports is a fundamental feature of the VAT as a destination-

basis consumption tax, the application of a particular rate to remove tax is not a core element

of the tax. It comes into effect for exporters only if core elements of the VAT – supply,

consideration, registration, etc. – have been satisfied. Issues ancillary to exports such as

inland transport to the port of export are included in this category as are issues related to

imports, including the reverse charge rules for imports of intangible supplies.

Other miscellaneous operational issues include the distinction between government fees and

taxes and accounting issues.

Non-concessional operational and core aspects of the GST account for almost 60 percent of

all interpretation decisions, with operational matters the largest single category of non-

concessional decisions. Concessional aspects account for a little more than 40 percent of the

interpretative decisions.

Figure 15 GST Interpretative Decisions, 2001-2014

Source: Interpretative decisions calculated by the authors from Australian Taxation Office database accessed

through www.ato.gov.au.

The balance between concessional and non-concessional issues tips even sharper in the

direction of non-concessional if appeals are considered, with only 6 percent of appeals

concerning concessional issues. Whatever initial complexity issues concessions raise, they

seem to be resolved without resort to litigation.

Figure 16 GST Issues, Tribunal and Court Appeals, 2001-2014

Source: Appeals of assessments calculated by the authors from Australian Tax Cases reports, 2001-2014.

3.3 Operational and core aspects of the GST

The Australian GST was enacted in 1999, effective from mid-2000. The drafters were able to

draw on advice from the home of the modern GST, New Zealand, and UK and continental

experts familiar with the operation of the traditional EU-style VAT. Adopting broad drafting


approaches, they sought to address in a comprehensive manner all the issues that had given

rise to complexity or uncertainty in other VAT systems. The definition of supply, for

example, included clauses to deal with the issue of passive supplies (refraining from

activities), supplies made in the course of illegal activities, and agreements to terminate

activities or rights. The definition of consideration included both positive payments and

forbearance agreements and specified that it did not matter if the payment or forbearance was

voluntary or involuntary. Nexus issues arising in classic European cases considering, for

example, whether donations of passers-by to the street musician constitutes “consideration”

for a “supply” by an “enterprise”21 appeared to be covered. Ancillary issues such as the

provision of a security deposit that would normally be returned to the provider, more akin to

a loan than consideration, and payments in exchange for vouchers or other evidence of

entitlement to future supplies whose nature was not yet known were specifically addressed.

The goal was to avoid the confusion of confusion and ongoing litigation that these issues had

created elsewhere, particularly in traditional VAT jurisdictions. A similar goal and similar

drafting approach was adopted for all operational aspects of the GST.

However well drafted the VAT law might be, there are areas of uncertainty that cannot be

avoided. In respect of both outputs and inputs, for example, it must be determined if supplies

and acquisitions are made by a person in a personal capacity or in the context of an

enterprise. Central concepts such as “financial supplies” or “residential premises” evolve

continuously, leaving them inherently uncertain. Even the best drafted VAT has complex

areas but the problems were compounded in Australia’s case by what proved to be very

problematic drafting of core concepts as well. The deposit provisions, for example, failed to

limit their operation to security deposits and opened the door to deferral for a range of

prepayments contractually labelled deposits. The voucher measures failed to limit their

operation to prepayments for uncertain supplies that could bear different tax rates, opening

another door to deferral. Almost immediately after the law was enacted a flaw with the core

definition of taxable supply was revealed – courts read the opening words used to introduce

the elements of a taxable supply as imposing a further condition of positive activity,

removing a range of supplies from the definition. Reluctant to return the law to the

Parliament for amendment, the government tried to resolve the issues with rulings and

litigation, compounding the uncertainty.

The result, not surprisingly, was both an unnecessarily complex law but one that generated

complexity in core and operational issues that could have been avoided. The volume, but not

the relative positions, of non-concessional decisions change as the tax matures, with the

number of decisions falling away quickly after the initial years.

21 Case C-16/93, R. J. Tolsma v Inspecteur der Omzetbelasting Leeuwarden [1994] STC 509.

Figure 17 Non-concessional Issues, GST Interpretative Decisions, 2001-2014



3.4 Concessional aspects of the GST

Concessional aspects of the GST account for 41.5 percent of all decisions. This suggests that

a broader tax base similar to the New Zealand GST could immediately reduce the complexity

of the GST more than 40 percent. The alternative, if the government is committed to micro-

managing or subsidising consumption choices, is clearer borders for the concessional supplies

to remove the uncertainty and consequent complexity.22

Concessions in the Australian GST law are particularly generous concessions. Australia has

no reduced rate and no concessional exempt supplies – all concessional supplies are

completely zero-rated or tax-free supplies. In addition to zero-rated food and health supplies,

there are zero-rating rules for education, child care, water, sewerage, pollution devices,

religious services and charitable activities. Food and health stand out, however, as the

sources of complexity when measured in terms of interpretative decisions – together they

account for over 85 percent of all interpretative decisions related to concessions and over 35

percent of all interpretative decisions. Health issues dominate food issues.

22 The apt term government “micromanaging” to describe the process of using tax to modify taxpayer behaviour

is borrowed from Hans Gribnau, “Corporate Social Responsibility and Tax Planning: Not by Rules Alone”

(2015) 24(2) Social & Legal Studies 225, 229.


Figure 18 GST Concessional Issues, Interpretative Decisions, 2001-2014



The pattern evident in interpretation decisions, which derive from queries prior to assessment,

does not continue to appeals of assessments. At the appeal level, food issues account for five

times the number of appeals as health issues.

Figure 19 GST Concessional Issues, Tribunal and Court Appeals, 2001-2014



The shift from health to food between interpretative decisions and appeals is explicable to a

large degree on the nature of the taxpayer. As explained below, a large portion of food

queries are from sellers of ethnic foods, most likely smaller retailers with limited resources

more likely to accept initial assessments than launch costly appeals. Suppliers of food also

include some very large manufacturers and the taxpayer in most food appeals is a very large



(most often a subsidiary of an international) manufacturer. Health issues also arise for small

and large suppliers. In the case of health issues, however, the largest suppliers are likely to

be those making supplies with far less room for interpretation as their supplies are likely to

fall into a group that, as explained further below, is defined by reference to detailed external

legislation.

As with interpretative decisions about non-concessional matters, the interpretative decisions

reflecting concessional queries dropped off quickly following the introduction period of the

new tax.

Figure 20 GST Concessional Issues, Interpretative Decisions, by year 2001-2014



Initially, concessions are clearly a problem in terms of the complexity of the GST. Over

time, however, they may not be such a serious problem. In the early years of the tax,

suppliers are confused by boundaries of concessions or, in the case of more aggressive

enterprises, looking for opportunities to exploit the boundaries and gain a competitive edge

over similar products with lower retail costs. A combination of a self-assessment regime and

regular returns over the course of the financial year means suppliers have to resolve

uncertainties immediately. This may generate high initial compliance costs but once it is

clear where existing products lie in respect of the concession boundaries, questions are only

likely to arise when new product lines are developed.

A breakdown of the components of the second most significant concession, supplies of food,

reveals four principal categories of concessional food: general food, “ethnic food” and

beverages. Ethnic foods are identified by detailed descriptions – as they are often named

using non-English terms and are not familiar to general taxpayers, the interpretation decisions

dealing with ethnic foods first describe the nature of the food in detail and then provide the

decision. Ethnic foods that generate ruling requests that end up as interpretation decisions are

most likely to be sold by smaller retailers specialising in supplies to particular ethnic

communities. The cost of classifying a particular type of food supply is not dissimilar for a

more common item stocked in large supermarkets and a speciality dish stocked in a handful

of dedicated ethnic shops. The sales base over which the costs can be amortised varies


tremendously, however and the burden borne by small shopkeepers selling speciality ethnic

foods is clearly much higher than that carried by large multi-store chains.

Figure 21 Categories of Food Concessions, Interpretative Decisions, 2001-2014



Health issues account for half concessional issues and over one-fifth of all GST interpretation

decisions. Like food issues, health issues were significant in the initial years of the GST but

have largely dropped away as a source of complexity.

Health issues fall into three categories with decreasing precision in the definitions over the

categories. The most tightly defined category is doctor and hospital care and medical

prescriptions as defined in external health and health insurance legislation. The relevant laws

applied by way of cross-reference in the GST Act defining drugs and procedures for medical

and health insurance laws are extremely precise. Questions that arise with respect of this type

of supply most commonly relate to whether ancillary supplies are provided in the course of or

as a consequence of prescribed treatments.

The second group includes a range of less tightly defined health supplies. A large number of

these were not initially considered by the government to be health services meriting

concessional treatment but were added to the law at the insistence of a minority political

party that controlled the balance of power in the upper house of Parliament at the time.23 The

initial description of many of these services is vague in the law -- eligible services include

chiropody, herbal medicine (including traditional Chinese herbal medicine, osteopathy,

naturopathy, podiatry and “social work”. The government attempted to establish boundaries

around the services by restricting eligibility to services by a “recognised professional in

relation to the supply of service” where the supply “would generally be accepted, in the

profession associated with supplying services of that kind, as being necessary for the

appropriate treatment”.24 An initial problem was trying to determine who would be a

recognised professional when there was no clear licencing procedure for some types of

23 24 A New Tax System (Goods and Services Tax) At 1999, s 38-10(1).


services. The final fudge was to define professionals by reference to state registration where

this was required or possible and membership of “a professional association that has uniform

national registration requirements” in other cases.25 Among other things, this prompted the

establishment of organisations or adoption of qualifying registration processes.

A third group covers services to disabled persons or supplies such as cars used by disabled

persons. Some supplies in this group are defined by reference to external legislation such as

the national disability insurance scheme,26 national disability support law,27 and [military]

veterans legislation,28 where this is available and relevant. Others, however, are more loosely

defined and many supplies have uncertain boundaries.

The number of interpretative decisions in each category directly reflects the certainty or lack

of certainty in the borders of the concessions.

Figure 22 Categories of Health Concessions, Interpretative Decisions, Total 2001-2014



3.5 Conclusion

While the GST law is replete with concessions, the vast majority of uncertainty arises in

respect of health and food supplies. Health and food classification issues proved not to be

perennial problems, however. More than 95 percent of the food queries came in the first four

years of the GST and 98 percent had come within the first five years of the tax. Health

queries were also concentrated in the early years, though it took slightly longer to sort out the

questions in the case of health. Still, 99.5 percent of the health queries were addressed in the

first six years of the tax and there has been only one health query in the last nine years.

Substituting direct subsidies for tax expenditures is the obvious way to remove a significant

portion of complexity from the GST, though unless the direct expenditures are better defined

25 A New Tax System (Goods and Services Tax) At 1999, s 195-1 “recognised professional”. 26 A New Tax System (Goods and Services Tax) Act 1999, s 38-38. 27 A New Tax System (Goods and Services Tax) Act 1999, s 38-40. 28 A New Tax System (Goods and Services Tax) Act 1999, s 38-505.


than the tax expenditures, the move may simply be a shifting of complexity. Whatever path

is followed, it is clear that cross-references to specialist legislation which identifies targeted

supplies with precision can remove uncertainty and complexity from the law. Unfortunately,

this only works with supplies that are already regulated or subsidised; subsidies adopted to

meet pressing political exigencies will be crafted with immediate objectives in mind, not the

long term compliance costs faced by taxpayers to access the subsidies. The scope of herbal

medicine is in the eye of the beholder.

More significant than tax expenditures in the long term are structural issues derived from the

fundamental design and drafting of the law. Some pressure points are inevitable and inherent

in a VAT. A tax that provides refunds of the excess of input credits over output tax invites

taxpayers to test the limits of the “enterprise” concept. A tax that distinguishes between

personal and business acquisitions and supplies made in personal and business context rests

on boundaries sure to be disputed. But the prime areas of complexity in the core and

operational elements of the tax law can be addressed relatively simply. The shortcomings in

the drafting of the definition of taxable supplies, security deposits and vouchers for future

supplies with unknown tax attributes could be fixed easily.

4. What is complex in the fringe benefits tax?

4.1 Operational, core and concessional issues in the fringe benefits tax

Although the fringe benefits tax is nominally imposed on employers, not employees, in

practice employees bear the cost through reduced cash salaries. Employers providing fringe

benefits commonly require employees to enter into salary sacrifice agreements that explicitly

reduce cash salaries by the cost to the employer of the benefit and any fringe benefits tax. If

the cost is less than the value to the employee and the benefit is exempt or concessionally

valued for fringe benefits tax purposes, the employee is likely to opt for the benefit over the

cash equivalent to the cost to the employer. While put forward by employers, queries leading

to interpretative decisions are for the ultimate benefit of both employers and employees as the

tax savings from concessions can be shared between them, with employees reaping higher

after-tax remuneration value and employers able to reduce the cost of remuneration packages.

The design of the fringe benefits tax law, as well as the proliferation of tax expenditures

embedded in the law appear to have played important roles in the complexity issues were

surprising. The law itself is a model of how not to draft readable tax law. A reader has to

plough through 65 sections before hitting the charging provision to discover what is actually

subject to the tax. But understanding the terms in that provision requires a reading of

significant portions of another section located 71 sections later in the law.

Yet despite its dreadful drafting in terms of layout, the fringe benefits tax legislation is a

model of principle-based design, standing in stark contrast to the income tax law applying to

a base constructed entirely on piecemeal inclusion and deduction provisions with no

principled fall-back system applying outside the individual inclusion and deduction measures.

The fringe benefits tax, in contrast, is structured as a comprehensive levy with a universal

fall-back position – unless explicitly excluded, the market value of all benefits of any kind

apart from salary or wages provided by past, present or future employers to past, present or

future employees directly or indirectly by way of arrangements with other providers is

subject to tax. Tax expenditures by way of reduced valuations or exemptions are explicitly

carved out with statutory definitions. There is no room for implicit tax expenditures arising

by way of lacunae between inclusion measures as occurs so often with the income tax.29

Flowing from the principle-based design of the tax, a number of outcomes were predicted.

First, it was expected that there would be fewer interpretative decisions concerning fringe

benefits tax than the number for other taxes both absolute terms and relative to the number of

taxpayers and the revenue collected. Second, because the concessions are clearly defined, it

was expected that the percentage of queries concerning concessions relative to general

structural questions would be smaller than for other taxes.

Neither prediction was realised. By reference to almost every indicator, the fringe benefits

tax is the most complex of all major taxes. Almost 60 percent of interpretation decisions

related to concessional deviations from the comprehensive rules. Non-concessional rules

comprising core and operational rules accounted for the remaining 40 percent of decisions.

Figure 24

Categories of fringe benefits tax interpretative decisions, 2001 – 2014



4.2 Non-concessional issues

While initial predictions concerning the relative complexity of the fringe benefits tax and the

proportion of fringe benefits tax issues arising from concessions were not reflected in the

results, the assumption that the principle-based drafting would remove complexity from the

core measures proved correct. In contrast with the GST, where problematic drafting of the

core and ancillary rules resulted in these emerging as the primary ongoing areas of

complexity, the core provisions in the fringe benefits tax – was there a benefit30 and was the

29 Richard Krever, “Analysing Implicit Tax Expenditures” (2011) 35(2) Melbourne University Law Review 426

at 445-448. 30 See, for example, ATO ID 2003/315 (no additional benefit from non-resource aspect of a loan that is fully on

commercial terms).


benefit a consequence of employment31 – give rise to little uncertainty and consequent

complexity. Only 10 percent of the total count is attributable to core issues.

Given the sweeping design of the core principles in the fringe benefits tax, concerning the

core rules tend not to involve borderlines but rather questions of fact. It is a factual question,

for example, whether an employee who is also in part owner32 or shareholder33 derives a

benefit in that person’s capacity as an employee or in the non-employee capacity. The few

instances that involved interpretation of the scope of core provisions inevitably concerned

circumstances that almost certainly had not been anticipated by the drafters such as whether

unintended benefits nevertheless amount to fringe benefits.34

Interpretation decisions on operational matters account for 30 percent of all decisions. This

group includes decisions on the valuation rules for (non-concessional) benefits and minor

benefits excluded for administration and compliance reasons, and on timing attribution

questions where benefits are accessed at a time other than when they are first made

available.35 It also includes include decisions on the scope of the “otherwise deductible” rule.

The “otherwise deductible” rule ties the fringe benefits tax back to the income tax and deals

with the provision of benefits such as equipment that would have given rise to an offsetting

deduction for the employee if the employee had been paid cash and acquired the benefit

directly.36

4.3 Concessional issues

While the GST includes concessions that cover a not insignificant portion of the national

economy (particularly food, health and education), the concessions constitute a minority of

issues triggering indicators of complexity and apart from the initial years of the tax when

suppliers confronted the concession boundaries for the first time, they have not proven to be a

significant cause of complexity. The concessions in the fringe benefits tax are less important

in terms of the overall economy but far more numerous and these have played a key role in

elevating the tax to its position as the most complex tax levied by the federal government.

31 See, for example, ATO ID 2003/316 (benefit realised under a non-recourse loan is attributable to the non-

recourse feature, not to the employment relationship where the loan was fully on commercial terms). See also

ATO ID 2003/317. 32 An example is the cancellation of a debt owed to an employee/owner of an apartment in a strata title

(condominium) complex – ATO ID 2001/253. 33 See, for example, ATO ID 2003/492 and ATO ID 2011/33 (fringe benefit and income tax measures

interpreted to attribute loan benefit to shareholder capacity) in contrast to ATO ID 2003/813 (fringe benefit and

income tax measures interpreted to attribute loan benefit to employee capacity). 34 See, for example, ATO ID 2003/233 (de facto concessional loan where employee not required to pay interest

on deferred repayment of unintended overpayment). 35 See, for example, ATO ID 2003/357 (benefit of cheque when presented to employee, not when cashed). 36 See, for example ATO ID 2001/304 (otherwise deductible rule not available for loan fringe benefit not related

to derivation of assessable income); ATO ID 2005/219 (otherwise deductible rule applies to loan provided to

employee and spouse and used to acquire investment property).

Figure 25

Concessional fringe benefits tax interpretative decisions, 2001 – 2014



Tax issues related to the provision of cars was the most significant source of initial

concession queries, accounting for 17 percent of the fringe benefits tax interpretative

decisions. The concession for cars is the most controversial and criticised fringe benefits

concession.37 It operates by setting a concessional value for car benefits below market value

which include the provision of a motor vehicle and all ownership and operating expenses. It

was originally adopted as a subsidy for the local automobile industry and its retention was

always justified by this goal. However, discrimination in favour of local producers would

have violated Australia’s international agreements and as a result, the concession applied to

all cars.

The valuation formula combined the “stand-by” value of the benefit (having a vehicle

available regardless of use) and actual personal use into a single formula. In its original form

adopted in 1986, the valuation presumed personal use fell as a percentage of use as total use

grew. As the largest component of the benefit value was calculated by reference to the value

of the vehicle itself, an employee could reduce the fringe benefits tax liability but using the

vehicle more. This perverse incentive led to practices such as long driving vacations shortly

before the end of the tax year when values were calculated. The formula was finally

replaced in 20** with one that presumed a constant ratio of personal to work use regardless

of the mileage but the concessional valuation remained. A proposal by an outgoing

government to remove the concession and fully tax the benefit38 was rejected by the new

government in 20**.39

In 2014, all three international car manufacturers operating in Australia announced their local

subsidiaries would cease production by the end of 2017. Given the total absence of targeting,

it is unlikely the tax expenditure supporting the inclusion of automobiles in remuneration

packages provide any noticeable subsidy for the local industry. However, even if there were

37 38 39


a benefit flowing to the local manufactures, this rationale no longer has a basis. The

government has nevertheless indicated it will continue the concessional treatment of car

benefits.40 It is possible that valuation queries might remain if the tax expenditure were

removed but it could be expected that queries and corresponding compliance costs would

likely fall with the removal of the concession as employees shifted from cars to cash

remuneration.

The second most significant source of queries giving rise to interpretative decisions,

accounting for 14 percent of all fringe benefits decisions, concern concessions for workers

working away from home, most often applying to benefits to workers in remote areas,

primarily the mining and oil and gas industries. Qualifying benefits include benefits in kind

and cash “allowances” presented as compensation for additional expenses incurred by

persons living away from their ordinary home for their employment. Examples include

employees housed in remote sites and fly-in and fly-out employees.

The remote workplace concessions arguably serve two purposes. One is to quantify the

amount of exempt benefits that might otherwise be exempt in any case under the “otherwise

deductible” rule had the employee received a higher remuneration and paid for the benefits

directly. This would likely be the case, for example, for employees with a permanent home

and home maintenance expenses met while working remotely. The second purpose is clearly

concessional, however, proving exemptions for benefits that are not necessarily matched to

documented additional expenses, as would be required for deductions.

The concession responsible for the third largest number of fringe benefits tax interpretative

decisions (7 percent of all fringe benefits decisions), relates to a concession found in the

income tax law, not the fringe benefits tax. Prior to the adoption of the fringe benefits tax,

measures were included in the income tax law to establish a concessional deferral regime for

employee share scheme involving options and delayed vesting of employer provided shares.

The rules have been modified from time to time to enhance or reduce ancillary partial

exemption concessions. Reconciliation provisions in the fringe benefits tax are intended to

preserve the income tax concessions but numerous issues arise in respect of the interaction of

the two laws, particularly in respect of benefits that may not fall squarely within the income

tax concessions.

is an exemption from fringe benefits taxation for employees of qualifying non-profit entities.

The exemption is an explicit subsidy for these organisations, allowing them to negotiate

lower cost remuneration packages with significant tax-free fringe benefit components. The

queries generally concern the status of an entity and whether it qualifies as a provider of tax-

free benefits.

The fourth source of decisions, accounting for 6 percent of all fringe benefits interpretative

decisions and 10 percent of all concessional fringe benefits ATO IDs,

Forty-five further concessions are provided for a wide range of employer-provided benefits.

The questions they raise account for 17 percent of all interpretative decisions. Most of the

miscellaneous concessions are thought of as “work related” concessions for benefits that have

some connection with work but on the basis of long-held doctrines and principle would be

fall on the personal consumption side of the work-personal divide. One of the most

40

significant of these is an exemption for laptops and similar devices. This exemption applies

not to employer owned equipment that is provided to an employee for use by the employee

but rather to equipment paid by the employer but then given to the employee so ownership

vests with the employee who is able to apply it for personal use or dispose of it to convert the

value back to cash. Queries relating to equipment of this sort accounted for 5 percent of all

fringe benefit decisions. In the 2015 budget, the government announced it would extend the

concession, perhaps foreshadowing further increases in complexity.

Those seeking access to concessions for employees working away from home and

concessions for employees of non-profit entities are the most likely to pursue questions of

uncertainty to appeal.

Figure 26

Concessional fringe benefits tax issues tribunal and court appeals, 2001 – 2014




Where's the Complexity in Tax Law?

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