September 06, 2014

Horse 1749 - Taxation Law - Et Cetera, Et Cetera, Et Cetera!

Taxation law is hideously complex.
The reason for this isn't because law makers like complex legislation but rather that they are always a few steps behind people who are constantly inventing schemes in order to get out of paying it.
Famously one of the slogans of the United States Revolution was "No Taxation Without Representation" though more properly expressed, the actual motives of practically everyone in the world ever are just the first two words: "No Taxation"

People do not want to pay for anything if they can get away with it. Two of the most delightful words in the English language are "Free" and "Cake" in that order and this underlying principle explains the rise of file sharing websites and the like but I digress. People don't even like paying something, even when what they happen to be paying for is the overall stability and cohesion of society except in very rare circumstances:
"I like to pay taxes. With them, I buy civilization."
- Oliver Wendell Holmes Jr., Former Associate Justice of the Supreme Court of the United States

Taxation systems should be designed in such a way that it is predictable, both in time and amount; that it is collectible, and that it isn't burdensome. The biggest issue for taxation legislators is the problem of collectibility and making sure that it is collected. Remember, people do not want to pay for anything if they can get away with it and exacting taxation from such people is often difficult and is itself expensive.

Just to illustrate the problem of collectibility, let's start with the example of one of my personal pet peeves - motor expenses and deductions.
The general principle of whether something is actually an expense and therefore deductible is laid out in Section 8 of the Income Tax Assessment Act 1997:
http://www.austlii.edu.au/au/legis/cth/consol_act/itaa1997240/s8.1.html
General deductions
(1)  You can deduct from your assessable income any loss or outgoing to the extent that:
(a)  it is incurred in gaining or producing your assessable income; or
(b)  it is necessarily incurred in carrying on a business for the purpose of gaining or producing your assessable income.
- Section 8.1, Income Tax Assessment Act 1997

This sounds simple enough, right? Expenses should relate to the income being generated. That's fair, reasonable and sensible.
Immediately our problem that people do not want to pay for anything if they can get away with it, rears its head and they start looking for ways to game the system. "My car expenses are necessary for my business," they'll whinge. Firstly, you have to see if that's actually true.

Travelling from your house to work isn't (and shouldn't be) deductible because income is generated at work and so it doesn't really matter where you live. Where you live either through choice or necessity  is your own business. I know that it sounds harsh but is it really fair that in effect, you ask everyone else to subsidise your trip to work just because you live far away?

Motor expenses incurred in the course of doing work should be those incurred in the course of doing work. If you travel from worksite to worksite, either as tradespeople or salespeople, then there is a very strong case that those expenses are incurred in the course of doing work; it's certainly stronger than the case for those people who work in the same office all day long.

What about those salespeople and managers? Even this starts to get really complicated. There is a stronger case to be made that tradespeople who drive a ute or a van, are going to be using that vehicle in the course of their work, than for salespeople and managers who are more likely to be driving a luxury car or a sports car. Those kinds of cars are more likely to be used for private use and sorting out which is which, might be something which they like to forget to tell you about.

The thing is that you can't even impose a material test upon usage, on the basis of kilometers driven either. A bread salesperson might visit ten different supermarkets in a day whereas a builder might be relatively static on one worksite.
Suppose you do decide to  impose a material test upon usage on the basis of kilometers driven, how do you test it? Where do you get the figures from? If you tell people that they need to keep a logbook, what's to make sure that those figures are truthful? Do the tax collectors have to then do audit checks of all the logbooks for proof?

You can't suggest some minimum number of kilometers that need to be required to be driven either. What about farmers? A manager's car which is driven from office to office might very well travel ten or even twentyfold the number of kilometers driven by a farmer's ute or tractor our in the fields.
If on the other hand you try and impose some sort of maximum number of kilometers, then what about those people who drive more than that? Haven't you just penalised them? If there is some maximum number of kilometers, then what's to stop everyone from simply using that as a figure?

What about other associated costs? What about car washes and cleaning? Someone who owns a Ferrari is more likely to claim that as a necessary expense because they want their car looking nice. There might be an expectation for a salesman to look impressive.
How about costs like spare parts and maintenance? A Ferrari is going to be more expensive to maintain than a Kia. Does this become a question of fairness? If it costs more to maintain a Ferrari than a Kia, haven't we in effect, just created a greater subsidy through taxation for the rich? Is that fair?

How about how motor expenses relate to personal income tax? Can I choose to have the business own and operate the vehicle in exchange for lower wages and thus lower the amount of income tax I pay? In answering that question, you immediately have to open a whole other set of questions with regards taxation on fringe benefits? If cars are owned and operated by businesses, again, how do you prove that they're not being used for private purposes?
Remember, people do not want to pay for anything if they can get away with it and in consequence an entire industry exists around the question of salary packaging and especially with regards to motor expenses.

What of other ownership costs? If interest on loans relate to buying the vehicle, should they be allowed as an expense? What if the car is under a leasing arrangement? What if that arrangement is between the business and an employee?

This sort of line of questions must inevitably result in rules, clarifications and qualifications surroundings those rules and this is only for one kind of expense!
Mutliply that sort of questioning across a range of industries, then do it for capital gains, then do it for gifts, asset ownership arrangements &c. and in doing so you need to create loads and loads and loads of rules just to cope with all the et ceteras.

People who do not want to pay for anything if they can get away with it are constantly looking for exceptions and loopholes and devising schemes so that they do not have to pay; this is especially true of the finance industry where the amounts of money to be saved by not paying are immense.
In consequence, all sorts of questions get asked like:
- Is a Jaffa Cake a cake or a biscuit?
- What sort of tax is payable if a chicken is cut into pieces, or roasted, or both, before it is sold?
- What is a sheep?
- What are the appropriate rates to depreciate assets?
- What about tax that I've already paid on income earnt overseas?

It's enough to throw your hands in the air in exasperation and run around like Yul Brynner in "The King & I" with his "et cetera, et cetera, et cetera" and then finding et ceteras multiplied by et ceteras.
Taxation law is hideously long and complex because it needs to be. If everyone is gaming the system all the time and actively inventing ways to get out of paying it, then it must require being added to and rewritten all of the time and in doing so, it will always lag behind people's new schemes.

Taxation law if anything is et cetera factorial. It is the ultimate &c!

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