Q: What is the tax value method?

A:
 The tax value method was recommended by the Review of Business Taxation as a better

way to calculate your taxable income.

o The tax value method applies one set of uniform rules to the calculation of all forms

of taxable income and losses.

 Under the tax value method taxable income is calculated on the basis of annual changes in

the tax values of assets and liabilities (including cash).

o This is in contrast to the current income tax law, which relies on legal definitions of

income and deductible expenses and a myriad of separate rules.

o In many ways the tax value method replicates the current system, but in a way that is

potentially much simpler and more logical.

o This improved structure of the law could reduce tax administration costs for

businesses and individuals.

 Some things would not change.

o The tax value method is not a new tax.

o The tax value method would not mean an increase in tax revenue.

o You could still calculate your taxable income under the tax value method by filling in

boxes in a TaxPack or other form, as you do now.

Further information
 The Board of Taxation has developed prototype legislation and other supporting material to

evaluate and test the tax value method. Details are available at the Board’s

website www.taxboard.gov.au.

Back to top
Q: Where did the tax value method come from?
A:
 The tax value method was recommended by the Ralph Review of Business Taxation.

o Before the Ralph review began, tax practitioners said that Australia’s tax system was

in a terrible state. They asked for changes based on simplicity, efficiency and equity.

o Tax practitioners said lower compliance costs and the minimisation of tax avoidance

opportunities would ease administration for taxpayers and the Australian Taxation

Office alike.

o Practitioners urged the Ralph review to design a new system that would allow us to

properly compete in the global economy. They said that, without a major overhaul,

our tax system would continue to place Australian business at a competitive

disadvantage.

 The Ralph review considered income tax laws to be very complicated and, in some areas,

difficult to administer and comply with. It said simpler and transparent tax laws would make

their operation more certain.

o The overall aim of the tax value method is to simplify income tax law with standard

tax rules.

Further information
 The Board of Taxation has developed prototype legislation and other supporting material to

evaluate and test the tax value method. Details are available at the Board’s

website www.taxboard.gov.au.

Back to top
Q: Why introduce the tax value method?
A:
 While the tax value method would not increase tax revenue, it could have a number of

benefits.

o The tax value method could make income tax law easier to learn, understand and

apply.

o The tax value method could reduce tax administration costs for businesses and

individuals.

 The tax value method could simplify the income tax system because the tax value method

is based on as few, and as simple, concepts and mechanisms as possible.

o The current law income tax has many different ways of assessing gains and

recognising losses for tax purposes; the tax value method would have one standard

way.

 The tax value method could add to certainty in the income tax system because it would

replace the different approaches the current income tax law takes to different transactions

with one standard treatment that deals with all transactions in the same way.

o Because there would be fewer variations, it would be easier to reliably predict how

the tax law would treat any particular transaction.

 The tax value method could make the income tax system more durable because it

completely describes the tax base.

o It would be less likely that the law would have to be amended to accommodate such

changes as technological developments. Changes to the law would only be

necessary to add to or reduce taxable income for particular policy reasons.

 The tax value method could make the income tax system more transparent because it has

one standard way of doing things.

o It would be easy to identify departures from the standard way.

  The tax value method could make the income tax system more equitable because it would

treat different taxpayers with the same economic circumstances in the same way.

o It would do that because it deals with every transaction in one main way.

o The current income tax law provides many different ways of treating a transaction

depending on how it is characterised. In some cases, more than one regime can

apply to the same transaction.

 The tax value method could make the income tax system more robust because there would

be fewer ways to avoid tax under the tax value method.

o The tax value method deals with all transactions in one standard way and treats

different taxpayers with the same economic circumstances in the same way.

o There would be a smaller variety of different regimes, so there would be less

incentive to re-characterise a transaction to move it to a more favourable regime.

Further information
 Other questions and answers provide more detail about these possible advantages the tax

value method.

Back to top

Q: How would the tax value method cut income tax law?
A:
 The tax value method would help to reduce the size of the income tax law, perhaps by

around 40 per cent.

 The reduction in the size of the law would come in two ways.

o The tax value method’s core rules and standardised concepts would automatically

deal with what is now covered by many disparate rules scattered throughout the
 current law. For example, perhaps the debt forgiveness provisions in Schedule 2C of

the 1936 Act and the 24 or so pages of existing law in sections 82KH to 82KK of the

1936 Act that deal with tax avoidance schemes could go.

o The Income Tax Assessment Act 1936 has to be rewritten anyway, to complete the

work of the Tax Law Improvement Project, whether or not the tax value method

proceeds – this project halved the size of those provisions which were rewritten.

 The redraft of the key capital gains tax rules into the tax value method format is an example

of the significant reduction in income tax law possible under the tax value method.

o The tax value method redrafting has reduced the size of the capital gains tax rules by

more than 70 per cent so far, and would reduce 40 capital gains tax events to 8 at

most.

 There are other areas where the tax value method could reduce or eliminate existing

provisions.

o The recoupment provisions in Subdivision 20-A of the Income Tax Assessment Act

1997.

o The provisions for deducting exploration and prospecting expenses in Subdivision

40-H of the 1997 Act.

o A whole lot of the trading stock rules that already use a system very similar to the tax

value method.

o The hire purchase provisions in Division 240 of the 1997 Act.

o The limited recourse debt provisions in Division 243 of the 1997 Act.

o The securities lending provisions in section 26BC of the 1936 Act.

Further information
 A new income tax Act written using the tax value method could be around 3000 pages (this

number of pages would be necessary to reproduce current income tax policy, such as

adjustments and reductions in taxable income).

 o The income tax legislation has grown from 81 pages (in 1936) to around 4500 pages

(in 2002).

Back to top

Q:Have the many alternatives to the tax value method been

considered?
A:
 There are many alternatives to the tax value method. The income tax regimes of most

countries are unique. There are also alternative tax bases, like expenditure taxes or wealth

taxes.

o The Review of Business Taxation discussion papers considered an alternative

approach based on the structure of the current law.

 The Board of Taxation has only been asked to evaluate the tax value method, but has

indicated that it will consider any alternative the business community presents.

o The tax value method aims to broadly reproduce present outcomes. Alternative

systems are more likely to change outcomes.

 The Board’ s tax value method working group has appointed a sub-group to consider an

approach (‘Option 3’) that takes some of the advantages of the tax value method (for

example, standardising some concepts) but not the whole package.

https://www.coursehero.com/file/28644847/Income-Taxation-Cpar-test-bankdocpdf/