Tax uncertainty.

• Jurisdiction: Australia
• Author: Pagone, G.T.
• Date: 01 December 2009

[Lawyers are taught to appreciate the value of certainty in the law. In the field of taxation, however, the law is often far from certain. This article examines some of the causes of uncertainty within tax law, including the inherent uncertainty of language, the mismatch between the lawyer's tools of statutory interpretation and a tax statute drafted using an economic or accounting understanding of tax concepts, differing judicial constructions of tax statutes, and the intentional uncertainty in the drafting of tax statutes to allow for discretion or to prevent tax avoidance. It is argued that community consultation and bodies such as a specialist tax tribunal may reduce uncertainty and allow the community to make an informed choice as to the desired level of uncertainty within tax law.]

CONTENTS I Certainty II Uncertainty in Tax Law A Capital and Income: Economic and Accounting Standards versus Legal Analysis B Judicial Construction of Tax Statutes C Uncertainty by Design, Discretion and Notions of Anti-Avoidance III Possible Institutional Change to Address Tax Uncertainty IV Conclusion Whoever hopes a faultless tax to see, Hopes what ne'er was, or is, or e'er shall be. (1) 1 CERTAINTY

At some point in a law course, every law student is taught about the importance of certainty in the law. At some point in a lawyer's career, every lawyer in every area of legal practice comes to appreciate the necessity of certainty in the law. Certainty is the foundation of the lawyer's craft and is, perhaps, the only contribution that makes us useful to clients and society. It is the lawyer's ability to predict the application of the law that helps us organise relations between people in their personal affairs, business relations and dealings with government. Without a reliable degree of certainty, contracts would be worthless and ongoing ordinary relations and dealings would be at risk of whim and fancy. Certainty in the law is fundamental to the rule of law, which holds that law 'should be clear, easily accessible, comprehensible, prospective rather than retrospective, and relatively stable.' (2) It is with that frame of mind that I turn to taxation.

11 UNCERTAINTY IN TAX LAW

There is a curious entry, some may say a curiously candid entry, under the heading 'Taxation' in The Oxford Companion to Law. (3) The first two and the last two sentences describe taxation as follows:

Traditionally the principal way in which the ruling classes in organized communities have oppressed, fleeced, and expropriated some of their subjects. It has been known from very early times, and from the earliest times the tax-gatherer has been an object of public fear, hatred, and execration.... Not the least evil features of the modern tax system are the army of unproductive civil servants concerned with the assessing and collecting of taxes, the enormous volume and constantly changing detail of the chaotic and largely incomprehensible body of verbiage called the law of taxation, the incomprehensible and frequently incorrect assessments, and the utterly irrational nature of the whole topic. In the law of taxation justice has no place at all. (4) Some may think this an extreme view. Perhaps it is, but it gives us a context in which to evaluate the role of certainty in tax law. Tax falls upon us in the ordinary course of our activities as a compulsory taking (5) from us of something that we, by definition, have earned or owned. How and when that may happen should be clear, predictable and free from whim, caprice or chance. Below, I reflect upon some causes of uncertainty in tax law and whether this uncertainty is desirable or deliberate. In doing so I should make it clear that 1 hold no hope for certainty in tax law in the future. Ten years ago, the Review of Business Taxation, in A Tax System Redesigned: More Certain, Equitable and Durable--Report ('Ralph Report'), recommended that reform to the anti-avoidance provisions 'be based around a clear articulation of the underlying policy of a restructured tax law'. (6) A few years before that we lived through the partial and incomplete rewriting of the Income Tax Assessment Act 1936 (Cth) (commonly known as the '1936 Act') as the result of what was optimistically called the 'Tax Law Improvement Project'. Forty years ago, at the First National Convention of the Taxation Institute of Australia in May 1969, a Mr R F Hughes wrote:

Some not very scientific, and probably far from complete, research has disclosed that, in the last eight years in Australia, at least two hundred separate articles in professional or business journals and papers presented at professional conventions or congresses have been concerned with taxation reform in one way or another. One wonders whether, therefore, anything further may usefully be said on this topic, or, if said, whether we will ever see reform. (7) At the same conference the then Second Commissioner of Taxation, Mr P J Lanigan, began his paper by recalling the four basic canons laid down by Adam Smith in 1776. (8) The second canon was:

The tax which each individual is bound to pay ought to be certain, and not arbitrary. The time of payment, the manner of payment, the quantity to be paid, ought all to be clear and plain to the contributor, and to every other person. (9) And yet stubborn uncertainty stubbornly remains. The more things change, as the French adage goes, the more things remain the same. (10) I doubt that we can do much more than gain some small insight into why that may be so.

Uncertainty may in part be an inevitable feature of language. Words are frequently capable of many meanings, some of which were not, or at least may not have been, intended when used in a particular context. One such example may be seen in Bourne (Inspector of Taxes) v Norwich Crematorium Ltd (11) in the context of a United Kingdom statute where the tax fell by reference to whether a building or structure was for the 'manufacture of goods or materials or the subjection of goods or materials to any process'. (12) A narrow question raised in that case was whether goods and materials subject to a process included the cremated remains of human bodies. Stamp J said of this:

In my judgment it would be a distortion of the English language to describe the living or the dead as goods or materials. The argument, of course, goes on inevitably to this: that just as 'goods and maeterials' [sic] is wide enough to embrace, and does embrace, all things animate and inanimate, and so includes the dead human body, so that other words to which a meaning must be given, namely 'subjection' and 'process', are words of the widest import. Parliament cannot, so the argument as I understood it runs, have intended to exclude from the definition a process whereby refuse or waste material is destroyed or consumed by fire and, putting it crudely, for it can only be put crudely, the consumption by fire of the human body is a process. I protest against subjecting the English language, and more particularly a simply English phrase, to this kind of process of philology and semasiology. English words derive colour from those which surround them. Sentences are not mere collections of words to be taken out of the sentence, defined separately by reference to the dictionary or decided cases, and then put back again into the sentence with the meaning which you have assigned to them as separate words, so as to give the sentence or phrase a meaning which as a sentence or phrase it cannot bear without distortion of the English language. That one must construe a word or phrase in a section of an Act of Parliament with all the assistance one can from decided cases and, if one will, from the dictionary, is not in doubt; but having obtained all that assistance, one must not at the end of the day distort that which has to be construed and give it a meaning which in its context one does not think it can possibly bear. What has to be decided here is whether what is done by the taxpayer, viz, the consumption or destruction by fire of the dead body of the human being, is within the phrase, 'the subjection of goods or materials to any process'. I can only say that, having given the matter the best attention that I can, 1 conclude that the consumption by fire of the mortal remains of homo sapiens is not the subjection of goods or materials to a process within the definition of 'industrial building or structure' contained in s 271(i)(c) of the Income Tax Act, 1952. (13) To the inherent ambiguity in language one may also add determined obfuscation, (14) nurtured, perhaps, by self-interest or institutional objective.

Another cause of uncertainty may be a mismatch between the underlying objectives expressed in statute and the potentially distorting tools used by lawyers to determine the meaning of the words used and their application. This mismatch may be seen in many contexts of tax law. The reason for the mismatch is essentially that the tools used by the law to discern or apply meaning may not reflect the non-lawyer's intention or meaning when the words were used or adopted. Take for example the distinction between capital and income, upon which our system of taxation so heavily depends. Whether a receipt or an outgoing has the character of capital or income will usually be obvious enough and the legal answer may well accord with the economic or accounting outcome which the statutory words were intended to express. However, that will not always be so, and one reason for this is that the lawyer's tools to determine the characterisation are different from those of an accountant or an economist.

A Capital and Income: Economic and Accounting Standards versus Legal Analysis

In this context, the courts have frequently said that what is income and what are allowable as deductions are matters for legal analysis rather than matters for determination by accountants or economists, (15) notwithstanding that the legal measure adopted in the...