ATO mulls changes for ‘confusing’ CGT system

The ATO has floated the idea of a simpler approach to elements of capital gains tax (CGT) in an effort to minimise what is currently a huge amount of “unnecessary and confusing clutter.”

Speaking at the Tax Institute and the Australian Tax Research Foundation 2017 forum, ATO second commissioner Andrew Mills said a simple principled approach to CGT events would bring about flexibility in dealing with changing world and emerging practices.

“A simply expressed CGT principle will cut a swathe through a significant amount of unnecessary and confusing clutter, saving enormous compliance and administration costs, increasing the productivity of the Australian economy and, importantly, making the tax practitioner’s life that much easier,” Mr Mills said.

“I find it difficult to fathom or justify a system that takes almost 200 pages of events regarding assets, their cost base and proceeds to say, ‘If you make a capital gain, include it in your income’.

“The current structure of the CGT rules dooms us to a continuing tinkering and potentially results in an even larger set of rules into the future.”

Mr Mills pointed to the draft white paper “Reform of the Australian Tax System” (RATS) released in 1985 as the “closest we got to a broad overarching policy statement of CGT”.

“The proposal contained in RATS in relation to taxing capital gains was simply that it be applied on a realisation basis with losses offset against gains or carried forward, an inflation adjustment mechanism and limited exemptions,” said Mr Mills.

“It mentioned nothing of the way in which the gains or losses should be identified or calculated.

“It was very briefly a glimmer of hope that we might have a principled approach.”

He argued that the solution was to keep it simple and state what was to be subject to tax in a principled way.

“In my view sections 6-5 and 8-1 and their predecessors, section 25 and subsection 51(1), provide the model,” added Mr Mills.

“If one was to express the relevant principle in the terms of those sections it would look something like this: Include in your assessable income any net capital gain that you make. A net capital gain is capital gains less capital losses.”

In reply, BDO tax partner Mark Molesworth argued that the current CGT events system made the law clear to the average taxpayer by specifying the particular fact and circumstance that give rise to the happening of that event.

“We end up with a statute that tells the taxpayer when they will be required to calculate a capital gain or loss, how, and which return they will have to put their capital gain or loss in,” said Mr Molesworth.

“Why replace such a system which sets out with such specificity and such relative simplicity, what it means and what taxpayers have to do?”

“I am concerned that any move away from the current CGT event system runs the risk of making the tax law less accessible for the average taxpayer.”

Instead of blaming the CGT events, Mr Molesworth urged to look at the policy underpinning the CGT regime itself.

“There is nothing inherently wrong with the CGT events, what we are missing is what we are trying to tax,” said Mr Molesworth.

“In reality, the CGT system has for many years not been about taxing the appreciation of the value of assets which are realised. It's an everything else tax.

“What needs to change is our expectation of the CGT system itself,” he added.

“I think we should just rename the CGT system to the Comprehensive Gains Tax system… we will end up with a system that is conceptually based.

“We will admit to ourselves this is no longer about taxing capital gains but we will require the need to state with certainty and simplicity where taxpayers have to return those gains and when they should return those gains.”

ATO mulls changes for ‘confusing’ CGT system
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