The Chairman of the Board of Taxation, Mr Dick Warburton, today released the Board’s report to the Government on its first post-implementation review which evaluated the non-commercial losses legislation in Division 35 of the Income Tax Assessment Act 1997.
The Board’s report on its review of the quality and effectiveness of the non-commercial losses legislation found that the intent of the legislation was delivered in a manner that was easily understood without any substantive unintended consequences or significant compliance burdens on the community. The Australian Taxation Office’s (ATO) implementation strategy was a significant factor in the smooth implementation of this legislation.
After considering the 24 submissions made to the review, the consultants’ evaluations and other information available to it, the Board made five recommendations (listed at Attachment A), four of which were to improve the administration of the legislation and one to broaden the eligibility criteria for the ‘other assets’ test.
The Government has advised the Board that it has:
- noted that the ATO has accepted the four recommendations that relate to improvements to the administration of the non-commercial losses legislation and that the ATO will issue additional guidance on the areas identified in the recommendations; and
- not accepted, at this time, the Board’s recommendation that assets in a simplified tax system (STS) pool (excluding cars, motor cycles and other vehicles) be counted towards the ‘other assets’ test in the non-commercial losses legislation.
- This is on the basis that the simplified tax system is a package of measures aimed at providing eligible small businesses with less complex tax arrangements. An integral component of the simplified tax system is that most business assets are pooled for depreciation purposes. Disaggregation of an STS pool for the purposes of the non-commercial losses legislation would be inconsistent with this approach.
The Chairman expressed his thanks to those who contributed to the review including the individuals and organisations that made submissions, the Board’s working group consisting of Mr Brett Heading, Mr Tony D’Aloisio and Mr John Bronger, officers of the Treasury and the ATO and the staff of the Board’s Secretariat.
The Board’s report and the submissions to the review are available from the Boards website www.taxboard.gov.au.
Background to the Review
The Board’s intention in undertaking post-implementation reviews is not to reopen debates about the merits of the policy underlying the legislation. Rather the intention is to gauge how effective the legislation has been in delivering the Government’s policy intent and to find out whether its implementation can be improved. To evaluate the effectiveness of legislation under review, the Board assesses the extent to which the legislation:
- gives effect to the Government’s policy intent, with compliance and administration costs commensurate with those foreshadowed in the Regulation Impact Statement for the measure;
- is expressed in a clear, simple, comprehensible and workable manner;
- avoids unintended consequences of a substantive nature;
- takes account of actual taxpayer circumstances and commercial practices;
- is consistent with other tax legislation; and
- provides certainty.
In undertaking its review of the non-commercial losses legislation the Board sought submissions from interested stakeholders, including taxation professional bodies, peak artistic organisations and primary producer associations, and advertised the review on its website. The Board also commissioned:
- a study from the Australian Taxation Studies Program at The University of New South Wales to evaluate the compliance and administration costs of the non-commercial losses legislation; and
- a study from BDO Kendalls to assess the quality and effectiveness of the legislation.
The Board also sought information on the development of the legislation and
its implementation from the Treasury and the ATO.
Although policy issues were explicitly excluded from the scope of the review, they were nevertheless raised with the Board during the review process. Reflecting its mandate in conducting post-implementation reviews, the Board only noted the policy issues raised and did not make any recommendations on them.
Attachment A
Post-implementation Review of the Quality and Effectiveness of the Non-commercial Losses Provisions in Division 35 of the Income Tax Assessment Act 1997.
Recommendations
Recommendation 1: The Board recommends that STS assets (excluding cars, motor cycles and similar vehicles) be counted towards the ‘other assets’ test in Division 35.
The Government did not, at this stage, accept this recommendation. The simplified tax system is a package of measures aimed at providing eligible small businesses with less complex tax arrangements. An integral component of the simplified tax system is that most business assets are pooled for depreciation purposes. Disaggregation of an STS pool for the purposes of the non-commercial losses legislation would be inconsistent with this approach.
Recommendation 2: The Board recommends that the application form for the Commissioner’s discretion and taxation rulings include additional non-primary production examples to make it clear that these business activities can also qualify for the discretion.
The Government notes the ATO has accepted this recommendation.
Recommendation 3: The Board recommends that the assessment process for the Commissioner’s discretion take more account of the intricacies of a particular business activity rather than relying on broad industry precedents.
The Government notes the ATO has accepted this recommendation.
Recommendation 4: The Board recommends that the ATO considers issuing additional guidance material on grouping, incorporating examples at the margin, to clarify the types of activities that may be grouped.
The Government notes the ATO has accepted this recommendation.
Recommendation 5: The Board recommends that the ATO should expedite a public ruling on what constitutes a professional arts business.
The Government notes the ATO has accepted this recommendation. The ATO met this recommendation when, on 12 January 2005, it released Taxation Ruling TR 2005/1 Income tax: carrying on business as a professional artist.