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The complexity of Australia's tax system

Australia's taxation system is excessively complex for a nation with a relatively small population base. This complicated system is most likely a product of our electoral system, and the reluctance of governments to make changes, which historically are not well accepted by their constituents.

Our income tax legislation was originally drafted in 1936 and you may be surprised to learn that a large part of this initial legislation is still in place today. Various governments have undertaken reviews of our tax system with the Tax Law Improvement Program introduced in 1997.

Instead of rewriting the legislation and starting with a blank canvas, the 1936 legislation was amended and adapted with clauses inserted to update the law. This process has continued over the years resulting in a bulky volume of information resembling an old piece of furniture covered in plaster and tape with bits of timber nailed onto the sides to hold it together.

I started my career in the mid 1980s and during that decade I saw major taxation changes that substantially affected how businesses handled their accounting processes. We had the introduction of Capital Gains Tax, new substantiation rules to support deductions, the introduction of Fringe Benefits Tax (FBT as we fondly refer to it), plus the implementation of the imputation system; just to name a few. The next big change was the introduction of the Goods and Services Tax (GST) in July 2000. Is your head hurting yet?

This process has created a complicated set of laws that can take years, and sometimes decades, to be tested. The Australian Taxation Office is aware of these issues and will often release public rulings, interpretive decisions and other documents which, in essence, outline their interpretation of the law. It doesn't mean they are correct, but if you follow their guidelines, they won't take action if ultimately the courts rule otherwise.

This brings me to the current problems with our tax system. My experience in dealing with the tax office over many years has highlighted that at times even they become confused in interpreting the law. As well as having a complicated taxation system, we also have a situation whereby governments are constantly under pressure with allocating resources.

So we end up with an overly complicated system being monitored by an under-resourced department in an ever-changing environment. To combat this problem, the Federal Government ensures the penalty regime is sufficiently scary to stop taxpayers pushing boundaries.

In my opinion, this can create an unfair marketplace where taxpayers, either purposely or naively, do not comply with the law as it is interpreted.  It can create a competitive advantage to those who push the boundaries, but only until they get caught.

If you're a punter and you want to test your luck by either doing the wrong thing or testing the law, then the odds of either getting caught or challenged are probably in your favour. But beware, the stick wielded by the Australian Taxation Office is a big one, and if you get caught or lose the argument, it will hurt!

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  • Cairns Office

    First Floor, 280-286 Sheridan Street
    PO Box 993N
    Cairns North QLD 4870

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