The Federal Government’s announcement last week (in the media killing-zone that is Friday afternoon) that it plans to introduce retrospective legislation to reverse consolidation tax laws rolled out only last year, further erodes the integrity of the tax system.
The Government’s announcement of yet another retrospective change to tax laws is extremely disappointing. It serves to further undermine the principles on which the tax system is based.
A fundamental principle of the legislative process is that laws which adversely affect taxpayers should not apply retrospectively except in extremely rare situations, such as addressing significant tax avoidance. This is not the case with these changes.
Taxpayers enter into transactions on the basis of the law as it is, not the law as it is rewritten after transactions have occurred. Retrospective changes in tax law are likely to interfere with bargains struck between taxpayers who have made every effort to comply with the prevailing law as at the time of their agreement.
The Government’s changes relate to the way a consolidated group can deduct the costs allocated to particular assets following a corporate acquisition. The changes will reverse amendments to the tax law passed by Parliament in May 2010 and further restrict the operation of the consolidation regime.
The changes will have a significantly adverse impact on some taxpayers back to 2002, when the law first commenced. They will also create inequitable treatment between taxpayers who are in similar situations, but applied the law as it stood at different times.
The Government’s announcement is the latest in a very concerning trend of retrospective legislation. We have recently seen amendments to the Petroleum Resource Rent Tax backdated to 1990 and proposed changes to the transfer pricing laws that will apply from 2004.
Whilst these changes stand alone on their own particular factual circumstances, the trend towards retrospectivity in legislation, particularly this latest reversal of tax provisions on which the Government consulted widely prior to introducing only last year, is a disturbing one.
During this period of significant market volatility the last thing that business needs is another hit to their profit and loss account from such a significant change.
Even the prospective part of the changes has the perverse effect of undermining the attractiveness of the consolidation regime, as taxpayers are skewed towards asset purchases rather than share purchases, hence eroding one of the key objectives of consolidation.
While the Federal Government consulted widely with tax experts and key industry bodies including The Tax Institute ahead of the announcement, the substance of the consultation was focussed on refinements. The Government did not countenance any changes to their policy decision to retrospectively change the law.
Do you like the Government's penchant for retrospective tax changes? Does it give you the certainty required to operate your personal and business affairs?
Robert Jeremenko is Senior Tax Counsel of The Tax Institute.
The Tax Institute is Australia’s leading professional association in tax. Its 13,000 members include tax agents, accountants and lawyers as well as tax practitioners in corporations, government and academia.