In Part I of this post I explored factors that might account for the massive proliferation in the volume of legislation and subordinate regulation in Australia over the last 30 years or so. The post was prompted by an article by the IPA’s Chris Berg. In the previous part I suggested some possible reasons for the regulatory expansion phenomenon, one of which I argued was the contest between courts and Parliament. I outlined the recent history of migration law as a paradigm example. In this part I’ll outline some aspects of taxation law and then suggest a couple of possible responses that might inhibit the expansion of unnecessary regulation.
The 1970s witnessed a series of High Court decisions in the income tax area which had the effect of igniting an explosion of tax avoidance schemes for high income earners. Entrepreneurial accountants waxed fat, promoting “bottom of the the harbour” or dividend-stripping schemes, trust stripping schemes and schemes based on highly artificial primary production or Australian feature film investment devices. The High Court’s most famous pro-tax avoidance decisions were Mullens v FCT, Slutzkin v FCT and Cridland v FCT all handed down in 1976-77 during the Chief Justiceship of former Menzies government Attorney-General Sir Garfield Barwick. Barwick is traduced by some as the “father” of the Australian tax avoidance industry. Journalist David Marr’s polemical biography of Barwick is typical:
Section 260 was a provision for which he had no sympathy. It was designed to put an end to ingenious and artificial schemes of taxation avoidance, yet to Barwick’s mind the ingenuity of a scheme was always a positive attraction. He believed that citizens had the right to profit to the maximum from their enterprise. He found section 260 vague in its sweep and, to a lawyer’s mind like his, such vagueness tends to end up as everything or nothing: the mind that reads section 92 to mean a great deal is likely, as in Barwick’s case, to see section 260 as virtually meaningless. … The process of reading down the limits of section 260, and the feats of construction and reinterpretation that involved, have proved the foundation of the tax avoidance industry. …
Tax was Barwick’s only triumph. The tax avoidance industry boomed in Australia in the late 1970’s as a direct result of the work of the Barwick High Court. Under Barwick’s guidance the court approached tax schemes with great precision and learning, dissecting them and taking little interest in their overall shape and the purposes for which they were put into operation. … Much of what was left of the power of the “catch-all” provision of section 260 of Income Tax Assessment Act was wrung out of it by Barwick and the court in 1976 in Mullens’ case. It was a peculiar personal triumph for Barwick for he established there a principle which had been rejected when he put it first to the Privy Council 18 years before in Newton’s case: that section 260 only struck down tax avoidance schemes set up to deal with previously accrued tax liabilities, that it only worked in the past tense.
Barwick’s own description of his approach to interpreting the Tax Act, in his autobiography “A Radical Tory”, is eerily similar to Kerry “Goanna” Packer’s attitude:
The liability to pay income tax is wholly derived from the law imposing and providing for the assessment of that tax. The obligation to pay it is a legal one. Some politicians try to treat it as a moral obligation. But it is not. The citizen is bound to pay no more tax than the statute requires him to pay according to the relevant state of his affairs.
Consistently with this view, it has long been a principle of the law of income taxation that the citizen may so arrange his affairs as to render him less liable to pay tax than would be the case if his affairs were cast in some different form. In the language of the layman, the citizen is entitled to minimise his liability to pay tax. This is sometimes expressed as a right to avoid tax, an expression which is in contradiction to the evasion of tax, a failure to pay tax which is properly due.
On this principle, I regularly acted. Provided the citizen’s transactions were not shams, pretences, the form of his transactions and their legal consequences would affect his liability to tax, even though that form might be unusual and adopted for the express purpose of limiting the liability to pay tax.
I do not countenance fraudulent dealings, or give effect to sham transactions or the destruction of records. But clearly I did not accept the view that there was a moral duty to pay tax. Further, I held the view that it is for the Parliament in passing laws imposing taxation to make its meaning as unambiguously clear and certain as the use of language will permit. In the event of ambiguity in such legislation, the citizen, not the executive government, should have the benefit of that construction of the language of the statute which is most favourable to his or her interest.
To its credit the Fraser/Howard Coalition government moved decisively to negate the assault on tax laws launched by the Barwick High Court. They made it a criminal offence for any person to render a company or trust unable to pay its tax debts; more controversially retrospectively made avoided tax recoverable; enacted new more comprehensive general anti-avoidance provisions (Part IVA) to replace section 260 which had been gutted by Barwick; and more generally enacted section 15AA of the Acts Interpretation Act which requires courts when interpreting legislation, especially in cases of ambiguity, to adopt “a construction that would promote the purpose or object underlying the Act (whether that purpose or object is expressly stated in the Act or not)”. It was specifically designed to thwart the Barwick practice of giving wealthy taxpayers “the benefit of that construction of the language of the statute which is most favourable to his or her interest” and insist instead that the court’s job was to give effect wherever possible to Parliament’s intended legislative purpose. The Hawke government later (in 1984) added section 15AB which allows courts to consult sources outside the four corners of the Act in question in their search for parliament’s purpose or intention. A more detailed account of these events and legislative responses can be found in a fascinating (if lengthy) ATO ebook titled Blatant, artificial and contrived: Tax schemes of the 70s and 80s.
This comprehensive legislative response to the challenge the courts had thrown down to the effectiveness of federal tax law was largely successful in allowing the ATO to get the tax avoidance industry back under reasonable control, although apparently super-wealthy individuals like the Packer family manage to continue to pay only a tiny proportion of their income in tax. Moreover it was a strategy that set the tone for the approach subsequently adopted by governments of whatever political colour. Especially in politically or economically sensitive areas, governments always move quickly, and usually with bipartisan support, and amend legislation to plug any loopholes opened up by litigation outcomes which undermine the intended operation of a regulatory regime. Thus, the process of government litigation setback followed by rapid remedial legislative response may account for a significant part of the increasing regulatory burden.
However we need to make an important point here. Berg’s use of the total number of pages of legislation enacted in a given year is a crude and somewhat misleading indicator of the extent of regulatory expansion. A fairly high proportion of Acts and regulations passed in any given year will be amendments of existing legislation rather than brand new legislation. As such, an amending Act may run to many pages in length but will usually repeal some existing provisions, and sometimes entire Acts, as well as adding new sections to the principal Act. It may also substitute new wording into existing provisions without adding to their length. The only way to get an accurate picture of the extent of expansion in the total volume of legislation would be to count the total number of pages of consolidated Acts and regulations at the end of each year. I have no doubt that would still show very significant ongoing increases in the total volume of regulation at all levels, but not to as great an extent as Berg’s figures suggest.
Why should we worry unduly about this phenomenon of regulatory expansion? In this morning’s Sydney Morning Herald, Ross Gittins quotes occasional Troppo contributor Saul Eslake as authority for the unsurprising proposition that excessive regulation is a significant contributor to Australia’s declining levels of productivity:
So how does Eslake explain the decline? By the absence of further significant micro-economic reform during the noughties (compared with the big payoff from earlier reform during the second half of the ’90s), but also by an increase in ”productivity-stifling legislation and regulation”, much of it in pursuit of ”national security” (in the aftermath of the terrorism attacks on September 11, 2001) and improved standards of corporate governance (following a series of corporate scandals in the US and Australia).
What can we do? I linked posts by Nicholas Gruen in Part I which contain some suggestions. I have two ideas to add, although neither of them is free from difficulty.
The first is that governments should expressly link the contract remuneration and promotional prospects of members of their Senior Executive Service to their achievement of measurable regulatory simplification targets. They should also require senior management to adopt some version of Total Quality Management strategies where management actively consult and engage “line” workers (the ones who have to understand and work with regulations at the front counter of any government department) in the regulatory reform process.
Secondly, Parliament should legislate to require courts (other than the High Court where there are constitutional impediments) to hear administrative law judicial review matters only after a grant of special leave if the citizen had available an avenue of merits review of the challenged decision by an independent tribunal (which will usually be the case at federal level). The criteria for special leave to seek judicial review of an administrative decision should be similar to those which already apply to appeals to the High Court. Section 35A of the Judiciary Act 1903 (Cth) requires the High Court in deciding whether to grant special leave to consider whether the matter is one of “public importance, whether because of its general application or otherwise” and/or “whether the interests of the administration of justice, either generally or in the particular case, require consideration” by the court of the decision under appeal. The High Court only grants special leave in about 20% of cases where it is sought. There are many decisions of lower courts which certainly involve errors of law but where the High Court doesn’t grant special leave because these criteria of public importance or wider significance than just individual justice aren’t satisfied. Why shouldn’t errors of law made by executive government merits review tribunals be similarly overlooked unless they raise significant issues of general public importance? I would argue that considerations of rule of law and fairness are sufficiently satisfied in relation to adverse administrative decisions by government departments and agencies where aggrieved individuals or businesses have the opportunity for review on the merits by an independent executive tribunal, even though they may not then be able to challenge that decision in a court unless their case raises wider issues of public importance. Hopefully this would reduce the frequency with which litigation results in legislative loopholes which then need to be plugged by a raft of remedial amendments.