Question

Australian taxration law.

Gary Goodman is your client, for the 2018/19 tax year. Gary along with Donya and Gisele are equal partners in a fashion design business- trading as "De la Mode". De la Mode received $750,400 from fees for design services provided this year and collected a further $210,200 from invoices outstanding from last financial year's services. De la Mode paid a salary to the secretary Olivia of $55,000 per annum, paid $26,000 in rent for the business premises and a further $185,000 in other business expenses. As a mark of recognition for Gary's pivotal role in securing a government contract for the business the partnership agreed to give Gary a $70,000 bonus payment. Required: Explain, with appropriate discussion of relevant case law, legislation and calculations the tax consequences of this arrangement for Gary

Answer 1

‘Simplification’ has been the mantra of tax reformers and tax deformers since the late 1950s and has frequently been cited as a rationale for tax changes in the closing years of the twentieth century and the opening years of the twenty-first. The near universal agreement by tax critics that simplicity is an object of tax reform is not mirrored by universal agreement as to what simplicity entails. For some, simplicity means a tax system that is easy and inexpensive to comply with. For others, it means simple and easy to understand language in the tax legislation. And for others still, simplicity means simple in its effect, with a comprehensive law containing a minimal number of distinctions and exceptions so all arrangements or transactions with similar economic effects will receive the same tax treatment.[1]

Measured against almost any test of simplicity, the Australian income tax law fails abysmally. While the costs of tax administration incurred by government are not high by international standards,[2] study after study shows the tax system imposes higher compliance costs on taxpayers than virtually all other income tax systems[3] and taxpayers almost universally believe the law to be complex.[4] The legislation may well be both the largest in the world in terms of sheer volume[5] and among the most difficult to read and comprehend.[6] Almost certainly, more irrational distinctions based on inappropriate criteria exist in the Australian law than in any other nation’s tax legislation with the result that minute changes in the legal form of a transaction can lead to dramatically different tax consequences.

In the mid-1980s, a government review of the Australian taxation system noted that ‘piecemeal improvements have been made to the system over the years but the point has now been reached where fundamental reforms — rather than further running repairs — are called for.’[7] By the start of the 21st Century, both the size and complexity of Australian income tax law had grown out of control. The legislation had expanded to many thousands of pages and it continues to grow at an exponential rate[8] — plotted on a graph, the growth curve reveals that if the trend continues, within a few years Australia will be the first nation in the world to boast an infinite number of pages in its income tax law!

This paper explores the phenomenon of complexity in the Australian income tax. The next part of the paper considers the causes of complexity, reviewing the possible contributions of the parties most closely connected to the tax system — the judges who interpret the legislation, the tax advisers who work with it, the drafters who write it, the Treasury that designs it, and the legislature that enacts it as law.

The paper concludes that all parties must bear some blame for the complexity but prime responsibility falls on the legislature on two counts. First, the legislature has failed to eliminate the irrational distinctions in the law to which most complexity can be traced and, second, it has added new layers of complexity by using the tax system as a spending tool to distort market and social behaviour.

The commercial transactions to which income tax is applied are among the most complex arrangements possible and it is inevitable that an income tax will acquire some of the characteristics of the transactions to which it applies. But if an absolutely ‘simple’ income tax in all the senses that word is used cannot be realised, simplification or the taming of the complexity of the current system is well within the realm of the achievable. The third part of the paper considers the two most recent proposals for simplification reform, redrafting the tax law in ‘plain English’ and the adoption of a new tax law based on a ‘tax value method’ in preference to conventional notions of gross income and deductions. It then outlines a very brief proposed prospectus for taming complexity. The paper suggests that in the context of current Australian political reality, the preferable model for reducing complexity in tax law is one based on incremental simplification.