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Radical new tax method mooted

FOLLOWING the Howard Government’s return to power, Australia may be the first country in the world to introduce a radical new method for determining taxable income.

Under the so-called Tax Value Method (TVM), taxable income would be determined by reference to taxpayers’ cash flows, along with assets and liabilities, and subject to modifications made for policy reasons.

Currently, we subtract deductions from assessable income to give us our taxable income.

A key recommendation of the Ralph Review, TVM, which also is known as Option 2, should make income tax law simpler and more streamlined. However, according to Treasurer Peter Costello, it won’t raise any extra revenue.

With Australians still suffering from tax reform fatigue, the Government must consider whether the introduction of TVM is worthwhile, or whether it’s just change for the sake of change. Can Australia justify introducing a radical new system for calculating income tax when no extra revenue will be raised?

Since the election, both the Treasurer and Prime Minister have indicated their commitment to continue with tax reform. In July 2002 the consolidation regime will be introduced, as will general value shifting rules, a foreign income account and non-resident withholding tax regime, and simplified imputation arrangements.

TVM is not expected to commence before July 1 2003, but Tax Board chairman Dick Warburton has indicated that draft legislation should be ready for public release by the end of this year.

Untested anywhere else in the world, the reaction of international markets to the introduction of TVM is unknown. And at this stage, the impact on individual industry also is an unknown factor.

One thing we do know is that the introduction of TVM would result in transitional costs. Businesses would need to learn new concepts such as changes in cash assets, and assigning tax values to assets and liabilities.

Business also may be up for costs in relation to seeking tax advice from external advisers, and updating tax software and business systems.

The Small Business Development Corporation estimated the cost incurred by each Western Australian business in preparing for the GST was $5587. Estimates of implementation costs for TVM are not yet available.

Apart from transitional costs, there also will be longer term compliance costs associated with TVM. Supporters of this new method argue that these longer term costs should be lower than those under the present system.

However, even if these benefits are realised, they also must outweigh the initial implementation costs of TVM, or businesses will be made worse off under the new system.

As well as increasing costs to businesses, TVM would add to the administrative costs of the ATO, Treasury and Board of Tax.

TVM is not just a system for business. It will also apply to individuals, and those taxpayers who have elected to use the new Simplified Tax System that was introduced on July 1 this year.

Earlier this year the Howard Government gave in-principle support for the TVM concept. With its recent return to power, and the impending release of draft legislation, the debate over whether Australia should introduce this radical new method is about to begin in earnest.

Business will be able to have an impact on the debate, and should be ready to provide input to the Board of Taxation. The board will be testing the draft legislation across a broad range of industries early next year and appears keen to involve stakeholders in its consultative process.

The Board of Taxation is expected to make its recommendation on whether to adopt TVM to the Treasurer in the first half of next year.

While few people would complain about reducing the volume of Australian income tax law, the jury is still out as to whether TVM is the appropriate way to proceed. Australian businesses must ask whether the potential long-term gains are worth the initial cost.

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