Income Splitting & Taxation

Catherine SmithB.a.Comm(Acc) C.P.A.

Masters of Taxation Program

ATAXUniversity of New South Wales

Tax Policy Unit
0401

October 2000

Abstract………………………………………………………………………………………………………………. 3

The Problem Outlined:……………………………………………………………………………….. 4

Introduction:……………………………………………………………………………………………………. 4

What is the problem?………………………………………………………………………………………. 5

Why has it grown?……………………………………………………………………………………………. 6

What is the problem with the growth in ‘independent contractors’…. 7

What has the Government done to address the problem?……. 9

Pre ’96 election proposals:……………………………………………………………………………. 9

Post election Project:…………………………………………………………………………………… 10

Reason why not addressed earlier????……………………………………………………. 11

The Government has finally taken action………………………………….. 13

(or has it?)…………………………………………………………………………………………………………. 13

RBT Proposals:……………………………………………………………………………………………….. 13

Industry reactions:…………………………………………………………………………………………. 13

The Measures introduced:……………………………………………………………………………… 15

Effectiveness of the new measures:………………………………………………………………… 15

Where to from now?………………………………………………………………………………………. 18

Family Taxation:…………………………………………………………………………………………… 18

Compulsory or Elective?…………………………………………………………………………….. 19

Elective ‘Joint Filing’:………………………………………………………………………………….. 21

Appropriate Rate:………………………………………………………………………………………….. 21

An Aggregate Model:…………………………………………………………………………………….. 22

An Average Income Model:……………………………………………………………………………. 22

Alternative Rate:……………………………………………………………………………………………. 22

Inequitable, Inefficient and Complex:…………………………………………………….. 23

Unfair to two income families:………………………………………………………………………. 23

Unfair to Individuals:……………………………………………………………………………………. 26

Cost Prohibitive:……………………………………………………………………………………………. 26

Alternatives to family taxation:…………………………………………………………….. 27

Conclusion:……………………………………………………………………………………………………… 27

Align or reduce the Top Marginal Rates?…………………………………….. 28

Conclusion:………………………………………………………………………………………………………. 29

Appendix One:…………………………………………………………………………………………………… 30

Bibliography…………………………………………………………………………………………………… 31

Abstract

Traditional canons of a taxation system are equity, efficiency and simplicity.[1]  One presumes the Government continually strives to balance these factors when determining strategic directions for the taxation system. This however, does not appear to be the case in the area of ‘income splitting’.
One must question why it has taken the Government so long to act on this issue?  To give tacit approval to income splitting?  So as not to interfere with industries that have been established on the basis of income splitting?  To encourage business and jobs in certain industries? Or as an indirect alternative to family taxation? 
This paper will outline what ‘income splitting’ is, why it has been growing so rapidly, why it is a problem, what the Government has done (or not done) to resolve the problem and finally, what should be done to resolve the problem.

The Problem Outlined:

Introduction:

The Government has been aware of the inequity, inefficiency and complexity caused by ‘income splitting’ since at least 1975.[2]  Income splitting creates inequity as it enables people in similar situations to be taxed quite differently.  It creates inefficiency as it generates extensive work for the Australian Taxation Office (ATO) and the Judiciary in attempting to address the problem.  It creates complexity by encouraging taxpayer’s to establish complicated entities or contracts.  Such complexity is also evidenced by the numerous sections in the Income Tax Assessment Act (ITAA) specifically designed to deal with income splitting[3]. It has become obvious to all that the existing system is not working.
Income splitting has been tacitly accepted by Government for decades.  The tax laws have indirectly and directly allowed income to be split through various mechanisms.  This has been achieved by the extensive use of companies, trusts, assignments, partnerships and leases between husband and wife (to name a few). While the concept of income splitting is readily applicable to all forms of income (eg; business income, investment, capital gains and personal services income), I have restricted my analysis in this paper to the topical issue of splitting ‘personal services income’, particularly through the use of ‘independent contractors’ and ‘personal service entities’.  As explained by Jeff Reilly, et al, “by the 1970’s personal service entities were in such widespread use that many tax practitioners would have described their use as an ordinary commercial or family dealing”[4]. 
Recently the Government has been concerned by the rapid growth of ‘independent contractors’[5] and personal service entities.  Previously the problem was prevalent only in certain key industries, predominantly, Building & Construction.  Recent research however, revealed a whole new range of workers hired under contractual arrangements.  These workers included industries such as shipbuilding, mining, computing, sales and even public service[6] and airline workers[7].
The previous Labor Government proposed a partial solution to the problem (as to which see later), but upon change of government the proposal was ‘thrown out’.  The ATO was instructed to continue to apply the existing, as explained above, deficient law.  It was only after an extensive Review of Business Taxation, (RBT)[8], that the Government accepted recommendations to partially[9] address the problem.  However, the final legislation differs markedly from the RBT recommendations and has been described as ‘a complete pushover of a piece of legislation’.[10]

What is the problem?

Briefly, the problem is that many ‘employers’ or ‘service requirers’ are increasingly choosing to hire their ‘employees’, ‘workers’ or ‘service providers’ under contract as opposed to traditional ‘employer/employee’ relationships.
The final Vabu[11]decision was a landmark loss for the ATO.  Vabu was the culmination of many years of court decisions consistently against the ATO’s assertion that workers engaged as contractors were in essence ‘employees’.  Vabu clearly indicates the Court’s recognition of modern day contractor relationships.[12]  This decision (and all those preceding) has made it very difficult for the ATO to enforce its withholding tax provisions where traditional employment relationships have been recharacterised.  The provisions are avoided by ensuring that the contract is for a ‘result’ not for ‘labour’ and includes a clause that allows the contractor to delegate the work to others.[13]

Why has it grown?

The use of the ‘independent contractor’ has grown due to manyperceived advantages. 
From the point of view of the employer these include:[14]

• Avoidance of on-costs such as payroll tax, worker’s compensation, fringe benefits tax and superannuation guarantee.

• Avoidance of the compliance costs of the above.
• Avoidance of industrial problems such as; awards, leave entitlements, unions, unfair dismissals, etc.
• Increased flexibility of labour, ie; able to hire and fire.
• Avoidance of vicarious liability that attaches to employees.

From the point of view of the employee these include:[15]

• Tax advantages.
• More flexibility in terms of when, where and how they work.
• Escaping the burden of PAYE taxes.

Not all of the above perceptions are valid.  The employer still faces the risk that the ‘contractor’ will be found by the courts to be an employee.  As expressed by Gray J in discussing the characterisation of the employee /contractor distinction:
“the parties cannot create something which has every feature of a rooster, but call it a duck and insist that every-body else recognise it as a duck…”.[16]
Despite this risk, it is most often the case that the suggestion to become a ‘contractor’ comes from the employer[17] as, if properly structured, such an arrangement can significantly reduce their on-costs.  To properly structure the arrangement, most employers insist that the individual form an ‘interposed entity’ such as a partnership, company, or trust.[18]  This does offer the employer some protection from the above problems as the legislative requirements for most of the above impositions require that the contract be with an individual and not an entity.[19]
The perceived tax benefits to the employee are much more dubious.  As will be discussed later, it is the ATO’s publicly stated opinion in numerous tax rulings[20] and countless media releases[21] that the perceived tax advantages are just that – ‘perceptions’.   As succinctly explained by Mike Bannon[22] “this daydream is often put to rest by the stark reality of our tax laws”.  To continue the analogy – the daydream of taxpayers has become the nightmare of the ATO in attempting to deal with the ever-increasing number of taxpayers avoiding income tax through income splitting arrangements.       

What is the problem with the growth in ‘independent contractors’. 

From the ATO’s perspective, the problem with the increase in ‘independent contractors’ is the ‘perceived’ tax advantages that include:[23]

• Not being caught by the PAYE net.  This  increases the Commissioner’s costs of collection.[24]
• Deferral of Tax Collected and potential for non-lodgment.[25]
• Reduced superannuation guarantee contributions.
• Ability to have ‘personal exertion income’ taxed at the Company rate.
• Ability to ‘split income’ with family members, thereby reducing overall tax burden.
• Ability to claim many more deductions, such as; cost of travelling from home to work, increased “aged based” superannuation benefits, car & superannuation for family members, home office expenses, etc.
• Reduction in High Income Earner Superannuation Surcharge and Medicare Surcharge.
• Manipulation of FBT on car benefits provided to associates

The ATO’s primary concern and focus has been on the ‘alienation of personal services income’ through the use of interposed entities.  Alienation of personal services income occurs where income is diverted from the taxpayer whose services generated the income, so that it is legally derived by an interposed entity, usually a family company or trust.  Of particular concern to the ATO is where that income is then split between the taxpayer and their family members or retained in the interposed entity.
Income from personal services is income that is earned by an individual taxpayer, predominantly as a direct reward for personal effort, the exercise of personal skill or the application of labour.[26]  It is the ATO’s view, as expressed in numerous rulings[27], that income from personal services cannot be ‘alienated’. 
The utilisation of this form of income splitting has been estimated by varying sources to cause tax revenue leakage of between $100 million to $8 billion per annum.[28]  In addition, it is presumed  there would be correlating leakages in terms of employer superannuation contributions, super surcharges, Medicare levies and surcharges, child support payments and increased social security benefits.  
The following diagram can visually demonstrate the increasing incidence of owner managers of incorporated enterprises.[29]
So if the revenue leakages are of the magnitude outlined above, one would presume that the Government has done all it can to address the problem?

What has the Government done to address the problem? 

Pre ’96 election proposals:

The May 1995 Federal Budget stated that certain labour market practices could, if no action was taken by the Government, have significant consequences for income tax and, in particular, PAYE revenue collection arrangements.  The Budget indicated that the law would be amended to ensure the PAYE provisions covered payments for the labour of an individual.  Further, it stated that the Government would be releasing a discussion paper that would set out the broad design features of new measures to counter alienation of personal services income.   It also quantified that, if no action were taken, the impact on the income base could be in the order of several hundred million dollars per annum.
Consequently, in late 1995, Income Tax Amendment Bill (No 5) 1995 was introduced into Federal Parliament to put into effect the proposed PAYE changes.  The discussion paper was also prepared. 
However, subsequent to the Labour Party’s defeat, the new Treasurer, Peter Costello, announced[30] that the Liberal government had decided not to proceed with the amendments or the release of the discussion paper.  Further the Government “asked the Commissioner of Taxation to ensure he continues to apply the existing provisions of the tax law, including the general anti-avoidance provisions”.

Post election Project:

In light of the above announcement, the ATO announced a National Project in December 1996.  The Project, a “Joint WHT/SBI Compliance Research and Improvement Project” focused on PAYE Erosion (due to the increased use of Independent Contractors) and Alienation of Personal Services Income.[31]
Briefly, the Project Aims were to articulate the ATO view, undertake a compliance program to safeguard the operation of the law, enforce the law, and highlight any legislative deficiencies.[32]
During the project the ATO made it clear that various mechanisms were to be used to assess the personal service income to the taxpayer (ref media articles).  These include, determining the whole arrangement to be a sham, using Sections 17, 19 and 25(1), or as a last resort Part IVA of the ITAA.[33]  The ATO remained firm on its stance that where alienation is effected for the sole or dominant purpose of avoiding tax, the general anti-avoidance provisions of Part IVA of the ITAA will apply.[34]    The courts and tribunals have confirmed the view that alienation of personal service income, predominantly for the purpose of reducing income tax, is ineffective for tax purposes.[35]
However, there are intrinsic problems with the necessity for the ATO to rely on Part IVA to strike down such arrangements.  Firstly, the lack of specific rules creates a compliance problem due to the uncertainty of the law.  Many taxpayers and their advisers manage to make a reasonable argument that their situation is outside the scope of the provisions.  Secondly, the nature of Part IVA requires that the ATO engage considerable resources in detecting those taxpayers that still believe they are outside the scope.  Thirdly, as mentioned above, given that Part IVA determinations require case by case decisions, further expenditure on resources becomes necessary.  And fourthly, these determinations are open to challenge in the courts, thus further occupying the judicial system.
Overall, the ATO has achieved some of the Project’s aims, most particularly in highlighting the need for legislative change.  However, the Project has not yet been completed and it’s recommendations are not yet  finalised or published.  It may well be reasonable to suggest that such recommendations  will now been made redundant through the announcements of the RBT.

Reason why not addressed earlier????

The Government has been accused of ‘scandalous dereliction of duty that has cost the revenue several hundred million dollars a year”[36]. It could be hypothesised that this inaction by the Federal Government has been to implicitly allow income splitting to continue.  The underlying reasons for this could be;¨       so as not to interfere with certain industries established on the basis of long held income splitting practices,¨       as an incentive to small business (particularly in certain industries), to compensate them for risk,¨       as a method of encouraging investment and jobs,¨       or perhaps even as an indirect alternative to family taxation by allowing families in certain industries to split income. 

It is not then surprising to see the intervention of industry bodies such as the HIA and MBA in a parsimonious attempt to maintain the status of many of their members.  It was acknowledged by the present Government that the reason they did not proceed with the previous Government’s proposals to address this issue (see above) was due to representations by certain industries.[37]
It can be presumed then that a “no change” policy was an indirect mechanism to allow tax “incentives” in certain industries to continue.  As correctly put by Warren, N.A. “clamping down on incorporation is anti-small business and this poses a major dilemma for a Government intent on encouraging the small business sector”.[38]
However, such a “no change” policy would not be openly admitted to by Government as this would not be acceptable tax policy (particularly to salary and wages employees). Economists would also argue that the risk of investing in any industry should be adequately compensated by the returns from profit.  Competitive economic theory dictates that the higher the undiversifiable financial risk the higher the economic return.  Accordingly, financial risk should not be underwritten by Government tax policy, unless done so overtly, by providing specific tax concessions or grants. 
A true cynic might also suggest that many politicians (on all sides), the judiciary and the wealthy have (their snouts in the trough) considerable vested interests in allowing the current regime to continue. 
The possibility that the inaction is an indirect alternative to family taxation can be evidenced by the building and construction industry where it is well known that almost all married contractors form husband and wife partnerships and split their incomes.  Whilst aware of this scenario, the Federal Government and the ATO have virtually turned a blind eye to such arrangements.[39]  Attempts to address income splitting within the building industry have been labelled as “harassing battlers trying to earn an honest living”.[40]
The Government can no longer afford to continue to ignore the issue.  The comprehensive Review of Business Taxation (RBT) that has been undertaken and the ensuing Report[41] has made it clear that the inequity of income splitting of personal services income cannot be allowed to continue.  The Federal Treasurer announced in his press release[42] that the Federal Government would adopt new measures to contribute to the fairness and equity of the tax system. Again a cynic might suggest that this was a forced outcome, as “to not do so would have left the business tax package more than $2 billion short of revenue neutrality”.[43]  It is also worth noting that it has been insinuated that the only reason the Federal Government instructed the Ralph Committee to review this issue was due to increasing pressure from the Australian Democrats in the tenuous GST negotiations at that time.[44]

The Government has finally taken action

(or has it?).

RBT Proposals:

The Ralph proposals were essentially designed to address alienation of income through interposed entities where the individual (service provider) is basically akin to an employee.  The Ralph committee recognised that “it is clearly inequitable to allow these practices to continue”.[45]
The Ralph committee stated that if this particular area were not addressed, the level of avoidance would grow to $3 billion per year.[46]
The Review recommended that the criteria to determine if one is an employee should be a comprehensive test based on the Victorian payroll tax system.  The review described this as the most ‘robust’ model.[47]

Industry reactions:

           The Australian Society of Certified Practicing Accountants (ASCPA) publicly stated its disappointed with the proposals and stated that the “proposed approach could treat individuals in similar situations very differently”.[48]  The Institute of Chartered Accountants has similar concerns about the broadness of the measures.[49]  Ray Regan, of the National Tax and Accountants Association (NTAA) stated that the measures would result in contractors paying an extra 52% in tax and hiring organizations paying an extra 25% in on-costs.[50]  It is interesting that these bodies are concerned with ‘obvious inequities’ of the proposals yet did not seem concerned with the inequities of the previous law.  
The Master Builders Association (MBA) raised the most objections stating that “the decision will have industrial ramifications and would undermine the efficiency of the housing sector, which has been underpinned by the contract system”.  Further that the proposals are “inappropriate and will create inefficiencies in the housing sector”.[51]  The HIA, the other major player in the debate,  stated the proposals would hurt ordinary homebuyers by pushing prices up. “Every brick laid will roughly double in cost” and “many contractors will be sold down the river”.[52]  Further that they would have “major ramifications for the economy”.[53]  The Information Technology industry is also concerned that the “change threatens the dynamism of the IT industry”.[54]
However, none of the representations spell out how these inefficiencies might arise. It is difficult to accept these objections as the Ralph Review makes it clear that there is no attempt to affect the relationship between service providers and business and it does not seek to make them common-law employees.  What the RBT recommendations do is try to make some people meet their full and proper tax obligations.[55]
If it is the case that housing prices will rise because taxpayer’s are being forced to pay the correct amount of tax then this is entirely appropriate.  Tax avoidance of this type should not be used as a mechanism for reducing costs and keeping marginal businesses afloat.  The fact that tax avoidance is used by industry bodies to justify their positions and attempt to bargain an outcome to maintain this position borders on contemptible.   Even more reprehensible is the fact that such bargaining has persuaded the Government.

The Measures introduced:

The Ralph proposals (or some permutation thereof) received royal assent on 30 June 2000 and apply from 1 July 2000.[56]  They are known as Divisions 84 – 87, Part 2-42, and ITAA 1997.
The measures attempt to restrict the ability of individuals to reduce tax by diverting income from personal services to another entity.  The measures also attempt to limit work-related deductions to those that would have been available had the service provider been employed by the service requirer. 
To be considered a ‘personal services business’ a business must pass one of four tests:

• The ‘unrelated clients test’,
• The ‘employment test’,
• The ‘business premises test’, or
• The contract is ‘for a result’, and requires the individual to provide ‘plant/equipment or tools of trade’ and the individual is ‘liable for rectifying defects’.

Contractors will be able to self assess against the first three tests where less than 80 per cent of their personal services income is earned from one source.  Where 80 per cent is more of their personal services income is obtained from one source, the contractor will need to apply for a determination form the Commissioner.
Further the government has given the ATO the flexibility to have regard to ‘customs and practice’ in an industry.[57]           There will be no withholding requirement on the part of the service requirer.

Effectiveness of the new measures:

The measures aim to create equity, efficiency and simplicity by attempting to:¨       Tax taxpayers in similar situations in a similar way.¨       Clarify the uncertainties in the current law, thus reducing compliance costs for the ATO, the Judiciary and taxpayers.¨       Remove the current incentives to form interposed entities solely for the purpose of income splitting.
However, the legislation introduced into law falls significantly short of its original goals.  In fact, the legislation introduced hardly reconciles with the initial Ralph proposals. 
The measures do not address the failings of the existing law and in fact, legislate the current inequity by effectively ‘allowing anyone with a smart accountant to avoid the provisions’.[58]
As quite correctly described by Senator Campbell:
“In this country tax bills are usually about closing the tax net, tightening tax loopholes and making people pay their fair share.  This bill is almost unique in the sense that the government has almost fallen over itself to allow people to exempt themselves from the provisions”.[59]
The provisions have been further described as “a $440 million dollar rollback of the Governments stated intentions”, “a clear example of the governments weakness” and “yet another broken promise”.[60]
Even more to the point is the claim that this is “The government, faced with competing interests of, firstly reducing tax avoidance and, secondly, furthering the proliferation of employment contractors, have adopted a spineless approach.  They have chosen to outlaw tax avoidance but create a series of criteria under which business can opt out”.[61]
Some of the problems inherent in the measures include:

• As the measures embody the doctrine of self-assessment, many taxpayers may still consider themselves outside the scope with little or no regard to the facts viewed in an objective manner.  This will likely lead to little reduction in the propensity of a taxpayer to represent their own position as being “reasonably arguable”.  The ATO will still have to expend considerable resources identifying such taxpayer’s, arguing cases, and eventually testing the new, yet no more clearly defined, boundaries in court. 
• The unrelated client’s test is a ‘fait accompli’ for those that earn less than 80% of their income from one source.  Obviously they are receiving income from two or more sources.  This makes the remaining tests irrelevant for these taxpayers.
• Even for those who earn more than 80% of their income from one source, the ‘unrelated clients test’ is wide enough to drive a truck through.  All one need to do is advertise their services and do an odd job on the weekend (even if only for family or friends).  As described by Senator Campbell ‘anyone who cannot pass this test is not trying….I never saw anything less likely to stop anyone evading tax in my life’.[62] 
• The ‘results’ test introduced at a late stage due to industry pressure (no difficulty in guessing which industry) basically introduces all of the common law problems with the existing law into legislation.  As has been found with the current law[63], it is possible to structure almost every contract to ensure it emphasises ‘producing a result’.  The bricklayer contracts (not for labour) but to build a wall.  The Computer Consultant contracts (not for labour) but to produce or test a program.  Even the humble Public Servant can contract (not for labour) but to produce a report.  Not to mention couriers.
• The ‘results’ test also introduces a very subjective test, how many tools? How much liability? It will cost taxpayers very little to simply include clauses in their contracts and buy a few tools and some insurance.  In fact, most of them already do this to get around the existing common law provisions.
• There is no further detail on the ‘customs and practice’ discretion provided to the ATO.  However, as this is being claimed as a major victory by the Building industry[64] one can presume it will be applied as a ‘no change’ policy for this industry.
• Even for those who admit to being captured by the provisions, there is no withholding requirement on the service provider.  This may result in failure to lodge returns and an increased burden on ATO debt recovery facilities.

It would appear that the government has gone two steps forward and three steps backward on this issue.  Far from simplifying and clarifying the law as it currently stands, the proposed measures have the potential effect of ensuring existing practices are legitimised.  Surely this must be contrary to the Federal Governments intentions?  Perhaps not.
It would appear that once again the Federal Government has succumbed to industry pressure and media hype.  The industry and media accusations outlined above may have affected the Federal Government’s chance of winning the next election if the public accepted the, unproven contentions, of the media hype that upward pressure will be applied to housing prices due to the proposals. 
This legislation is a classic example of political propaganda at its worst.  The Government has not only appeased pressure groups by ensuring the current inequities are allowed to continue, but has legislated these inequities into law.  Further, and worse still, it portrays to the mugs that know no better, that it has taken action to reduce such inequity.

Where to from now?

As it is unlikely that the Federal Government will ever address the problem directly, it is necessary to examine other alternatives.  Such alternatives include:

• Changing the unit of taxation from the individual to the family.
• Aligning the top marginal rates.

Each of these alternatives will now be examined briefly before concluding with the recommended way forward for the Australian Taxation System.

Family Taxation:

It is unquestionably inequitable that a taxpayer earning business income and splitting it several ways will pay less tax than another taxpayer earning the same income.  This was recognised as far back as 1974 by the Whitlam Government.[65]  According to recent research, contractors in the building industry on average paid $6217 less in tax than their PAYE counterparts per annum.[66]  This is manifestly unfair.  As the Federal Government seems unable (or unwilling) to prevent ‘income splitting’ for those that are able to, an equitable way forward often proposed is to allow all taxpayer’s to income split by treating the family as the taxing unit or ‘joint filing’.
The idea of treating the family as the taxing unit has been muted since 1975 when the Asprey Committee considered joint returns.  It stated that “…in practice married couples largely share or pool their expenditure.  Much is jointly consumed…it is their ability to pay rather than the way the total is formally divided between them”.[67]
Family taxation or some form of joint filing applies in many countries including; Belgium, France, Germany, Greece, Ireland and the United States.  Australia could examine the practice of these countries in order to determine best practice.  The Taxation Institute of Australia (TIA) recommends the adoption of the German model where basically the couples combined income is halved, the tax on that is calculated and then doubled.[68]  Interestingly, this would provide the same tax payable as for those who ‘income split’ under the current system.  However, it would make it more equitable as it would apply to all families rather than only those who have the opportunity to do so.
As explained by the TIA such a proposal would create an environment where setting up complicated minimisation strategies would not be attractive to most families.[69]
Whilst the above solution may appear, at first glance, to be an equitable and viable alternative, it has its own inherent problems and raises many equity, efficiency, simplicity and policy concerns.  These will now be elaborated on.

Compulsory or Elective?

Firstly, it has to be decided whether to make the system compulsory or elective.
The right to be taxed as an individual has always been a principle of taxation in Australia.[70]  To withdraw this right for women, by requiring her to file jointly with her husband, has been described as to lump her with “infants, idiots and insane persons in the category of an incapacitated person”.[71]  As concluded by Asprey, K.W. the taxation system should pay full regard to and treat all women, whether married or single, as completely free and individual persons.[72]   Such a step backward from the current system would be seen as retrograde to women in particular and would not be accepted by the majority of the electorate.  It is also true that many men would not want their finances compulsorily intermingled with their wives.
Secondly, the assumption made above that in practice married couples largely share or pool their expenditure has been widely contested.  Studies have demonstrated a marked complexity of financial arrangements, from complete sharing and integration to extreme inequality of access to resources.[73]  To assess tax payable by one spouse by reference to the income of the other is grossly unfair if that spouse does not have access to the income of the other.
Thirdly, compulsory joint filing can result in either a ‘marriage penalty’ or ‘marriage advantage’ by changing the tax payable on the basis of marital status.[74]  Tax policy should remain ‘marriage neutral’ as the marriage decision is essentially a private choice.[75]
Fourthly, it can be quite difficult to define the ‘marriage unit’.  Regard must be given to the ever-increasing complexity of ‘social arrangements’.  In contemporary society, de-facto couples have a right to be accepted as ‘married’ and have been on many instances recognised by the courts as such.  However, it is administratively difficult (if not impossible) to correctly determine  de-facto status.  This is further complicated by the increasing phenomenon of ‘same-sex’ couples.  A marriage biased tax system could result in taxpayer’s (of all walks and kinds)  structuring their affairs so as to be considered de-facto or not.  Further still, are the complications of extended family units such as certain nationalities where it is commonplace for parents, children, in-laws and grandparents to all reside under one roof.  Finally, there are the complications caused by family companies and trusts, ie; whether the income of these should also be included in the family’s income.
For all of the above reasons, it is concluded that compulsory ‘joint filing’ is not feasible in an Australian context.  Indeed, the Asprey Committee in 1975, recommended that families be provided with the option of taxation on a family unit basis.  This overcomes social policy concerns that the individual has a right to be taxed and some of the problems with the definition of a family.

Elective ‘Joint Filing’:

The notion of elective ‘joint filing’ raises many questions and problems that will now be discussed.

Appropriate Rate:

Firstly, is the difficulty in determining an appropriate ‘married unit’ tax model.  Looking to international comparisons for assistance there seems to be basically three prominent options;

• an aggregate model,
• an average model,
•  or a model somewhere in between.

An Aggregate Model:

An aggregate model is basically calculated by adding together the couples’ income and applying the applicable tax rate schedule (which would have to be determined after extensive revenue analysis).
The problem with an aggregate model is that it results in a higher tax payable for the married unit, known as the ‘marriage penalty’ or the ‘marriage disadvantage’[76](see Appendix one for calculations).  If such a system were optional no couples would elect to be taxed under the regime.  The implementation of such a scheme would therefore seem improbable.

An Average Income Model:

An average income model, as recommended by the TIA (above), effectively allows all electing couples to ‘income split’.  It is achieved by adding together the couples income, dividing it in two, applying the appropriate marginal rate and then multiplying the tax payable by two.  Whilst on the surface this system appears equitable, a deeper analysis of such a regime raises more equity concerns than it resolves.

Alternative Rate:

The remaining choice of a rate somewhere between the aggregate and the average model has, by its very nature, all of the problems associated with both rates, albeit to a lesser degree.   Lambert and Beer have examined various models including complete income splitting, dependent children only income splitting, and income splitting up to certain thresholds and conclude that under all options there are more taxpayers worse off than taxpayers better off.[77]
The particular equity, efficiency and simplicity problems associated with family taxation will now be explored in detail.

Inequitable, Inefficient and Complex:

Unfair to two income families:

Firstly, the only beneficiaries of such a regime would be ‘one income’ couples, where the working partner (usually the husband) is earning income that is currently unable to be split (generally salary and wages), and the spouse has chosen not to work.  Lambert and Beer have economically demonstrated this.[78]  This regime disadvantages and is discriminatory against ‘two income’ couples, sole parents and single individuals (elaborated upon later).  As succinctly put by Edwards, M “The old tax canon that a married man should pay less tax than an unmarried man on the same income is becoming indefensible from both an equity and an efficiency perspective”.[79]
In relation to ‘two income’ couples, should Couple C (a ‘two-income couple) pay the same tax as a Couple B (a ‘one-income’ couple) on the same overall income (see Appendix 1 for calculations)?  The ‘two-income’ couple may include legitimate ‘income-splitting’ couples where both partners equally contribute to an income earning venture or where both partners earn salary and wages.  The ‘one income’ couple have made a lifestyle choice that one spouse is not going to work.  In my opinion, and the opinion of others[80], this choice results in many lifestyle advantages over the ‘two income’ couple. Firstly there is considerable, although hard to measure, value in the unpaid ‘household work’ performed by the non-working spouse. This ‘household work’ includes management tasks such as ‘strategic decision making, negotiation, initiation, policy, budgeting, time management, priority setting, etc,’.[81]  The household in effect can be viewed as a little ‘factory’, a multi-person unit producing meals, health, skills, children, education, etc.[82] This ‘household work’ also has to be performed by the ‘two-income’ couple but sometimes at the expense of their income (if they pay for it to be done, eg: a housekeeper and convenience food) or at the expense of their leisure time.  Expenses incurred for a private purpose are not deductible (even if they are earned to assist you to return to work) and leisure time is not taxed.[83]  And as so rightly explained by Scott Burns, “Time, not money, is the fulcrum and measure of our experience”.[84]  The ‘one income’ couple have significantly more ‘time’ than the ‘two income’ couple.  A subsidy to leisure time provides no benefit to society[85] and is inequitable as this subsidy is at the expense of other taxpayers who do not indulge in such luxury[86].  Taking this one step further, it has even been suggested that because of the above, both a utilitarianism and an ability to pay approach indicate that a’ two income family should pay less tax than a one income family’.[87]
Secondly, the ‘household work’ performed by the non-working spouse enhances the earning capacity of the working spouse by increasing their available time to undertake more work or acquire further skills.
Thirdly, the non-deductible nature of childcare expenses (an issue in itself) severely disadvantages the ‘two-income’ family. Should a ‘two-income’ couple who earn the same as a ‘one-income’ couple pay the same tax when the ‘two-income’ couple may pay up to $300.00, or more, per week in childcare, to enable them to earn the second income?  This is demonstrated by the U.S. approach whereby couples are jointly taxed, but childcare is deductible.[88]
Fourthly, the ‘two-income’ couple may also incur significant non-deductible expenses in earning their income such as travel to and from work and work clothing.

Fifthly, married couple taxation would generally mean lower marginal tax rates for the primary earner and higher rates for the secondary earner (relative to individual unit taxation).[89]  This would be a powerful incentive, combined with the interaction of the withdrawal of social welfare payments[90], to deter the non-working spouse from entering into the paid workforce.[91]  In fact, it has been estimated that such a regime would result in a fall of about 9% in the labour supply of working married women.[92]
Finally, it has been postulated that two income couples already bear more tax than any other types of families.[93]  Any further increase in this tax burden (relative to one income couples) would further exacerbate this inequity.
Some additional administrative problems that arise are in relation to privacy.  What if the couple don’t want each other to know their income details and who gets the refund or bill?  In addition, the PAYE TID system would become very difficult to administer.[94]
Further, the above mentioned problems in relation to the definition of ‘marriage’ would still arise.

Unfair to Individuals:

In relation to individuals, marital income averaging is particularly harsh on single taxpayers.[95]  Why should Master A pay significantly more tax than Mr B purely because he is not married (see Appendix 1 for calculations).  All of the above examples in relation to a ‘two-income’ couple also apply to an individual.  This was the main criticism of the US system that resulted in the introduction of a new rate schedule to ensure that a single person’s tax would not exceed that of a married couple on the same income by more than 20%.[96]
One could also be very provocative and raise the controversial fact that each individual has the choice as to whether to marry or not and whether to have a child, or children, or not.  Leaving social welfare arguments aside, should one taxpayer be financially forced to subsidise the personal choice of another taxpayer?
The above mentioned harshness to individuals is further exacerbated in the situation of single parents.  The single parent is unable to utilise the benefits of income splitting but they will face the higher tax rates/GST rates required to fund such a proposal (see below)

Cost Prohibitive:

Finally, the annual cost to the revenue of adopting such a system has been estimated to be some 3.9 billion.[97]   To maintain revenue neutrality, the rate scale would have to be lifted by 2.21% across the board[98] or the additional revenue raised through other taxes, such as a higher GST rate.  This would be to the detriment of all taxpayers and very harsh on low-income taxpayers, single parents, and low ‘two income’ couples who would not gain substantially from the proposed regime.

Alternatives to family taxation:

As concluded by Lambert & Beer income splitting does not differentiate between families with or without dependents, nor by the number of dependents.[99]  In contrast, family payment systems can be designed so as to directly benefit couples based on the number of children.  Lambert and Beer modelled the affect of spending the cost of introducing income splitting (3.9 billion as outlined above) directly on families with dependent children and concluded that such a proposal is more effective in assisting families.[100]

Conclusion:

It is for all of the above reasons that most OECD countries have moved away from joint taxation.[101]   In relation to Australia, in line with the conclusion of the 1975 Draft White Paper the Government should maintain the individual as the unit of taxation for reasons of:
·         Equity to individuals and ‘two-income’ couples.[102]·         Efficiency to minimise the distortion of choice between paid employment v ‘household work’.[103]·         Simplicity as the individual system is administratively simpler.·         Policy to promote equal employment opportunity, independence of women[104] and neutrality of marriage choice.[105]
As can be seen allowing all families to ‘income split’ only advantages one sector of the community and disadvantages the rest.  Such a system would only be reasonable tax policy if it were the Government’s intention to encourage women to stay at home with their children.  In my opinion, and the opinion of others[106], the Government does not intend and has no place to make such policy.
Although it may be arguable that ‘family taxation’ may overcome the problem of ‘income splitting’, this would only be a viable solution if it was justifiable on other grounds.  “Two inequities do not make an equity”.[107]

Align or reduce the Top Marginal Rates?

In its recent discussion paper[108] the Government acknowledges that the level of income tax is too high[AGL1].  The proportion of taxpayers now falling into the top tax bracket is 20%, compared with only 1% in 1970. 
The government agrees in its above mentioned discussion paper that high marginal rates result in individuals entering into tax minimisation arrangements.  The most common being the diversion of their income to an ‘interposed entity’, usually a Company, to have their income taxed at the Company rate currently at 36%.
As noted by the TIA not all taxpayers have the capacity to enter into such arrangements and nor should such be seen as necessary.[109]
Aligning the top marginal rate to be equivalent with the Company rate removes some of the incentives to incorporate.  “This should be a precise alignment to send a strong and unambiguous signal that there is no tax arbitrage that can be extracted from incorporating”.[110]
As Australia’s company tax rate is already in the upper half of the global rate tables, it would not be economically feasible to increase the Company tax rate.[111]  It would be more feasible to reduce the top marginal rate (and FBT rate) down to equate with the Company rate.  Such a move could be made economically feasible, as part of an overall reform package, by introducing a broad based consumption tax at an adequate rate to compensate for the loss of revenue.

Interestingly, it appears that the Government has no intention of adopting the above alternative.  In contrast, they are proposing to reduce the Company rate down to 30% and have left the top marginal rate unchanged (although increased the income at which this rate cuts in marginally).
Even if such a proposal were adopted it would not remove the incentive to ‘income split’ with family members to take advantage of the progressive nature of the tax rates.  It would however ameliorate the incentive to some extent by making it less profitable.[112]

Conclusion:

It is unlikely that there will be any chance of further reforms in this area in the near future.  The Federal Government was hesitant to examine the issues initially and, and explained above, only referred them to the RBT committee under duress.  The RBT have concluded their review and the Federal Government has managed to water down the proposals enough to ensure status quo is not disturbed.  As explained above family taxation is not a viable option and reducing marginal rates is not on the horizon.
It would therefore seem that the only solution is to allocate the ATO enough resources to effectively enforce the new legislation, albeit that it is clearly deficient.  A saving grace is that legislation provides, that where the service provider receives more than 80% of their income from one source, they are required to apply to the Commissioner for a ‘personal services business’ determination.  In other words it is the Commissioner who will determine whether the above outlined deficient ‘unrelated clients test’ and ‘for a result test’ apply to these contractors.  If the Commissioner is given adequate resources to thoroughly investigate thousands of applications then there is some hope that the more blatant cases will be halted.
Such thorough investigation will require considerable resources to sort the facts from the truth, test the borderline cases in court, and conduct audit programs to verify that those that have ‘self-assessed’ have done so correctly.    A further saving grace is that where these audits reveal blatant structuring to avoid these provisions Part IVA will still operate.  So, as put by the ASCPA, ‘it is not quite open slather on income splitting’.[113]
In fact the Democrats suggest that such audit program should encompass a random sample of 2500 audits.[114]  This all seems remarkably similar to the existing, resource intensive, alienation of income project that the ATO has been conducting for over 3 years.
In the words of the famous childrens’ nursery rhyme, “and the wheels of the bus go round and round………”.

Appendix One:

Bibliography

[1] See generally; Aust, Taxation Review Committee Full Report (Asprey Report) (Canberra: AGPS, 1975).[2] Ibid[3] Such as Income Tax Assessment Act 1936 Part IVA and Div6.[4] Reilly J & Szekely L, Contracting and Income Splitting. (Australia: CCH, 1988)pp??.[5] Independent studies have found, in 1994, one in thirteen workers, was a self employed contractor.  Over 500,000 people, or 7.5% of the workforce was self-employed.  The corresponding figure five years earlier was only 3.3%. Taxation Institute of Australia.  Moving Away from Employment Relationships. Part 1.   (Western Australian State Convention. May 1997), at 541.[6] See generally; Mike Taylor, ‘Finance looks at contracting out’, Canberra Times, 9 September 1997.  Mike Bannon,  ‘ATO gets tough with Companies’, Canberra Times, 27 March 1994.   Mike Bannon, ‘Splitting your Income May Attract Penalty’, Canberra Times, 5 February 1995.[7] Financial Review, 11 August 2000.  Case Report (1997) 74 IR 466.[8] Aust, Review of Business Taxation.  A Tax System Redesigned.  (RBT Report) (Canberra: AGPS, July 1999). [9] .  The proposed Alienation of Personal Services Income regime is only a partial measure in that it, in no way, redresses the situation of those with investments or non-Personal Services Income being able to split income with impunity.  Such is the case in regard to the Entity Taxation proposal.   The government clearly acknowledges that the new measures do not stop income splitting through family discretionary trusts. Aust, Review of Business Taxation.  A Tax System Redesigned.  (RBT Report) (Canberra: AGPS, July 1999).[10] Senate Hansard: New Business Tax System (Alienation of Personal Services Income) Bill 2000.  Senator Campbell.  21 June 2000, p14411. [11] Vabu Pty Ltd v FcofT F C of T (1996) 33 ATR 537; 96 ATC 4898 (Vabu)[12] See generally; Mark Hanrahan, Tax Practice Briefing, A Tax Counsel and Practice Management Publication.  Number 14, August 1997.[13] See generally; Mark Hanrahan, Tax Practice Briefing,  A Tax Counsel and Practice Management Publication.  Number 14, August 1997.[14] See generally; Taxation Institute of Australia.  Moving Away from Employment Relationships. Part 1.   (Western Australian State Convention. May 1997), at 540.   Millar B, ATO, ‘Contractors, Employees & PAYE’  A presentation to the Taxation Institute of Australia, (NSW, 1996).[15] Ibid.[16] Re Porter: re TWU (1989) 34 IR 179 at 184.[17] Millar B, ATO, ‘Contractors, Employees & PAYE’  A presentation to the Taxation Institute of Australia, (NSW, 1996).[18] See generally; Smith, C, ATO.   ‘A Joint WHT/SBI Compliance Research & Improvement Project’.  Industry Report.  Federal Government. (Canberra: June 1998). (unpublished)[19] Superannuation Guarantee (Admin)Act 1992 s12(3),  Income Tax Assessment Act (ITAA) 1936 s221(1), Fringe Benefits Tax Assessment Act (FBTAA)   s136(1).[20] Income Tax Rulings 2121, 2330, 2503, 2639, 2129, 2408, D9/97,[21] Lampe A, ‘A strike on splitting’, The Sydney Morning Herald.  16 April 1997, pg 5.  Tax Tips. Issue no:2, (ATO Canberra Branch, May 1995).  Agent News, Issue No 35, (ATO Canberra Branch. August – September 1994).[22] Bannon M, ‘Mythical images emerge of life as a Contractor’.  Sunday Times.  April 12 1998. pg 10.[23] See generally, ‘Alienation of Personal Services Income Project.  A Joint WHT/SBI Compliance Research & Improvement Project’. Executive Summary & Recommendations.  (ATO, December 1998).[24] See generally; Moving Away from Employment Relationships. Part 1.   (Western Australian State Convention. May 1997), at 541.[25] See generally; Chochula P, Senior Tax Counsel, ‘Employees v Contractors’.  Continuing Professional Development Program.  Seminar Paper. (ATO: February 1998).[26] See Taxation Ruling IT2639, at 3[27] See generally, Taxation Rulings IT 2121, 2330, 2503, 2639, 2129, 2408, TD 95/34 & 94/71, D9/97[28] Boreham T, ‘Putting Contractors on PAYE’, Business Review Weekly, January 29,1993. pg 23.  Van Leeuwen H, ‘Employees pedaling away from PAYE’, The Australian Financial Review,  September 8, 1997, pg 7.  ‘Income Splitting Blitz’  The Sunday Mail (SA) 12 October 1997.  Rees P ‘Crackdown on ‘trust’ tax cheats’. The Sunday Telegraph, 24 August 1997, pg 45.[29] Aust, Review of Business Taxation.  A Tax System Redesigned.  (RBT Report) (Canberra: AGPS, July 1999).[30] Press Release no.71, Treasury. 20 August 1996.[31] Thomson R: Deputy Chief Tax Counsel, ATO, ‘Alienation of Personal Services Income’. A paper presented to the Australian Society of CPA’s.  Tax Update: 27 February 1997. [32] Ibid[33] See generally, SBI Curriculum.  ‘Training Module – Alienation of Personal Services Income through Interposed Entities’.  (ATO: March 1997).[34]             ** Part IVA applies when:·         There is a scheme as defined in section 177A;·         A tax benefit as defined in section 177C(1) is obtained by a taxpayer in connection with the scheme;·         The scheme is one to which Part IVA applies having regard to the matters set out in section 177D;  ·         The Commissioner is entitled, under section 177F to determine that ‘personal services’ income be included in the assessable income of the service provider.The ATO achieved this by determining that the ‘scheme’ is the diversion of personal service income to the interposed entity.  Part IVA generally allows the Commissioner to cancel the tax benefit under the scheme.[34]             Tupicoff v FcofT F C of T (84) ATC 4367. FcofT F C of  T v Gulland Watson & Pincus. (85), ATC, 4765.   Bunting v FcofTF C of T. (89), ATC, 5245.   Daniels v FcofTF C of T. (89), ATC, 4830.  Case W58, (87), atcATC, 524.  Case X90, (90), ATC, 648. Case Y13, (91), ATC, 4990.   Case Y28, (91), ATC, 296. Case Y29, (91),ATC, 301.   Liedig v FcofTF C of T, (94), ATC, 4269.  Osborne V FcofTF C of T, (95), ATC, 4323[35] Ibid.[36] Willis R, ‘Ralph’s tax crackdown was Labor policy’. The Australian Financial Review.  November 11, 1999, pg 23.[37] Treasurer’s Press Release No 71, 20 August 1996.[38] Warren N, Tax facts and tax reform.  Australian Tax Research Foundation.  Research Study No. 31, 1998, pg 84.[39] Switzer P, ‘Tax Office to give micro operations splitting headache’.  [40] ‘Hands off battlers’.  Sunday Mail.  October 12, 1997.[41] Aust, Review of Business Taxation.  A Tax System Redesigned.  (RBT Report) (Canberra: AGPS, July 1999).[42] Press Release. No.074. The New Business Tax System: Stage 2 Response.[43] Willis R, ‘Ralph’s tax crackdown was Labor policy’.  The Australian Financial Review,  November 11, 1999, pg 23.[44] See generally; Skotnicki T,’Union revives ‘subbie’ tax battle’.  Business Review Weekly, June 18, 1999, pg 46.[45] Above note 40.[46] Senate Hansard: New Business Tax System (Alienation of Personal Services Income) Bill 2000.  21 June 2000, p14411.[47] Senate Hansard: New Business Tax System (Alienation of Personal Services Income) Bill 2000.  21 June 2000, p14412.[48] Fenton Jones M, ‘Crunch Time for Contractors’.  The Australian Financial Review.  Friday, November 12, 1999. pg 56.[49] Ibid.[50] See generally; Media Release – NTAA. Ralph Review stage 2 attacks up to 800,000 contractors.  12 November 1999.[51]Fenton Jones M, ‘Crunch Time for Contractors’.  The Australian Financial Review.  Friday, November 12, 1999. pg 56.   Chandler M, ‘Subcontract business torpedoed’.  The Australian Financial Review. 16 February 2000, pg 30. [52] Media Release – NTAA. Ralph Review stage 2 attacks up to 800,000 contractors.  12 November 1999.[53] Senate Economics Legislation Committee. Parliament of Australia. June 2000, pg 10.[54] See generally, Way N,  Contractors: The pinch of tax reform. Business Review Weekly, March 10, 2000.  McCoy T, ‘You might be good at computing but…’  The Canberra Times.  February 14,2000. [55] Way N,  Contractors: The pinch of tax reform. Business Review Weekly, March 10, 2000. [56] Except for certain PPS payees who have been excluded from the provisions until 1 July 2002.[57] HIA Housing.  Australia, May 2000, pg 67.[58] Senate Hansard: New Business Tax System (Alienation of Personal Services Income) Bill 2000.  21 June 2000, p14411.[59] Ibid @ p14412.[60] Senate Hansard: New Business Tax System (Alienation of Personal Services Income) Bill 2000.  21 June 2000, p14411.[61] Senate Hansard: New Business Tax System (Alienation of Personal Services Income) Bill 2000.  Senator Campbell.  21 June 2000, p14411.[62] Senate Hansard: New Business Tax System (Alienation of Personal Services Income) Bill 2000.  Senator Campbell. 21 June 2000, p14413.[63] Smith C, ATO,  ‘A Joint WHT/SBI Compliance Research & Improvement Project”.  Industry Report.  Federal Government’. (ATO: June 1998). (unpublished)[64] HIA Housing.  Australia, May 2000, pg 67.[65] See generally; Taxation Reforms: Problems and Aims, Treasury Taxation Paper No 1, (Canberra: AGPS, 1974, pp3-7).  Aust, Taxation Review Committee Full Report (Asprey Report) (Canberra: AGPS, 1975).[66] See generally; Skotnicki T,’Union revives ‘subbie’ tax battle’.  Business Review Weekly, June 18, 1999, pg 46.[67] Aust, Taxation Review Committee Full Report (Asprey Report) (Canberra: AGPS, 1975).[68] See generally; ‘Tax reform. Let there be no half measures’.  Taxation in Australia. Volume No 1.  No:4.  April 1998, pg192.[69] Ibid, at pg192.[70] See generally; Aust, Taxation Review Committee Full Report (Asprey Report) (Canberra: AGPS, 1975).[71] Asprey K W, Aggregation of incomes of Husband and Wife in Family Unit Taxation. Taxation Review Committee.  Commissioned Studies.  (Canberra: AGPS,1975, pg.6).[72] Ibid.[73] See generally; Cass B & Whiteford P, ‘Income support, the labour market and the household’.  Households Work. (University of Melbourne. 1989, pg 149).  J.G. Head, ‘Changing the Tax Mix’.  Papers presented at a conference organizedorganised by the centercentre of policy studies – Monash University.  J.G. Head.   Albon R, ‘Australian Tax Unit: An Evaluation’. Australian Tax Research Foundation, Pg 333.[74] See generally; Stotsky J, ‘The choice of Taxable Unit’. In Tax Policy Handbook.  Shome P.  (Fiscal Affairs Department  International Monetary Fund.  Washington, D.C. 1995, Pg 124).[75] Lambert S & Beer G, ‘Taxing the Individual or the Couple: A Distribution Analysis’.  NATSEM, University of Canberra. Discussion Paper No. 15, September 1998, pg 3.[76] See generally; Asprey K W, Aggregation of incomes of Husband and Wife in Family Unit Taxation. Taxation Review Committee.  Commissioned Studies.  (Canberra: AGPS,1975, pg.6).  Head J G, ‘Changing the Tax Mix’.  Papers presented at a conference organizedorganised by the centercentre of policy studies – Monash University.   Galper H, ‘Tax Proposals of the U.S. Treasury Department’  Australian Tax Research Foundation , pg 23.[77] See generally; Lambert S & Beer G, ‘Taxing the Individual or the Couple: A Distribution Analysis’.  NATSEM, University of Canberra. Discussion Paper No. 15, September 1998.[78] See generally; Lambert S & Beer G, ‘Taxing the Individual or the Couple: A Distribution Analysis’.  NATSEM, University of Canberra. Discussion Paper No. 15, September 1998,.[79] Edwards, M, ‘The income unit in Australian tax and Social Security Systems’, (Institute of Family Studies, 1984).[80] See generally; Lambert S & Beer G, ‘Taxing the Individual or the Couple: A Distribution Analysis’.  NATSEM, University of Canberra. Discussion Paper No. 15, September 1998, pg 6.  & Apps, PF. ‘The tax unit: an Australian perspective’, in Head J, Taxation Issues of the 1980’s, (Australian Tax Research Foundation, Sydney. 1983).[81] Draper M, ‘Women in the home’, Households Work. (University of Melbourne, 1989, pg 86).[82]Cass B & Whiteford P, ‘Income support, the labour market and the household’.  Households Work. (University of Melbourne. 1989, pg 149).[83] See generally; Apps P, ‘Effects of a tax mix change’. Head JG & Krever R,(eds) ‘Taxation towards 2000’.  (Australian Tax Research Foundation.  Monash University. 1997, Pg 109).[84] Ironmonger, D.  ‘Households and the household economy’. Households Work.  (University of Melbourne. 1989, pg 5).[85] This argument has been contended by others who suggest that a tax system that encourages women to enter the labour force may have adverse affects on the family structure and educational attainment of children.  (see Stiglitz, JE.  Economic of the Public Sector.  WW Norton & Company.  New York, pg 529.)  However, this opinion of this author remains that such a value judgement (ie; whether women should work or stay at home with the children) has no place in tax policy.[86] See generally; Edwards, M, ‘The income unit in Australian tax and social security systems’ , (Institute of Family Studies, 1984).[87] Stiglitz, JE.  Economic of the Public Sector.  WW Norton & Company.  New York, pg 528.[88] Ibid.[89] See generally; Aust, Reform of the Australian Taxation System, (Draft White Paper) (Canberra: AGPS, 1975, pg 60).  Pender H,  The Joy of Tax.  (Australian Tax . Discussion Paper no.. February Research Foundation.  1997. Research Study Number 26, pg 83).[90] See generally; Warren NA, ‘Australian Tax Reform process: Flawed from the Start’.  Paper presented at a Business Tax Forum: Strategies and Solutions organised by ATAX at the Sheraton n the Park, Sydney, 15 September 1998, pg 14.[91] See generally; Aust, Reform of the Australian Taxation System, (Draft White Paper) (Canberra: AGPS, 1975, pg 60).   Head JG, ‘Changing the Tax Mix’.  Papers presented at a conference organizedorganised by the centercentre of policy studies – Monash University (Australian Tax Research Foundation).  Morgan DR, ‘An Agenda for Tax Reform’.Pg 12.  Apps P, ‘A Comparative Analysis of Income Tax and Transfer Options’. Australian Tax Reform. In Retrospect and Prospect.  JG Head(ed).  Papers presented at a conference organizedorganised by the Centre of Policy Studies, Monash University.  (Australian Tax Research Foundation.  Conference Series No: 8, 1989, pg 264.)[92] See generally; Lambert S & Beer G, ‘Taxing the Individual or the Couple: A Distribution Analysis’.  NATSEM, University of Canberra. Discussion Paper No. 15, September 1998, pg 10. [93] Warren NA & Harding A, ‘Who pays the Tax Burden in Australia’ Estimates for 1996-97. NATSEM, University of Canberra:  Discussion Paper no.39. February 1999.[94] See generally; Lambert S & Beer G, ‘Taxing the Individual or the Couple: A Distribution Analysis’.  NATSEM, University of Canberra. Discussion Paper No. 15, September 1998, pg 9. [95]  See generally; Albon R, ‘Changing the Tax Mix’.  Papers presented at a conference organizedorganised by the centercentre of policy studies. Monash University.  J.G. Head(ed). (Australian Tax Research Foundation). “Australian Tax Unit: An Evaluation’. Pg 331.[96] Aust, Taxation Review Committee Full Report (Asprey Report) (Canberra: AGPS, 1975, pg 133)[97] See generally; Lambert S & Beer G, ‘Taxing the Individual or the Couple: A Distribution Analysis’.  NATSEM, University of Canberra. Discussion Paper No. 15, September 1998, pg 11.[98] Ibid[99] Ibid @ pg 30.[100] Ibid, pg 35.[101] See generally; Lambert S & Beer G, ‘Taxing the Individual or the Couple: A Distribution Analysis’.  NATSEM, University of Canberra. Discussion Paper No. 15, September 1998, pg 7. [102] See generally; Albon R ‘Changing the Tax Mix’.  Papers presented at a conference organizedorganised by the centercentre of policy studies.  Monash University.  J.G. Head(ed).  (Australian Tax Research Foundation. Australian Tax Unit: An Evaluation. Pg 331).[103] Ibid.[104] See generally; Aust, Reform of the Australian Taxation System, (Draft White Paper) (Canberra: AGPS, 1975, pg 62).[105] See generally; Albon R ‘Changing the Tax Mix’.  Papers presented at a conference organizedorganised by the centercentre of policy studies.  Monash University.  J.G. Head(ed).  (Australian Tax Research Foundation. Australian Tax Unit: An Evaluation. Pg 330).[106] See generally; Apps P, ‘Effects of a tax mix change’ in Taxation towards 2000.  J.G. Head & R. Krever(eds) . (Australian Tax Research Foundation.  Monash University. 1997.Conference Series No: 19, Pg 117).[107] Ibid.[108] ‘The Australian Taxation System in need of Reform’. Statement by The Honourable Peter Costello, MP.  (Canberra: AGPS,  1998, pg 3).[109] See generally; ‘Tax reform.  Let there be no half measures’.  Taxation in Australia. Volume No 1.  No:4.  April 1998.[110] Lehmann G, ‘First, stem the exodus from PAYE’. The Australian.  Friday, September 26, 1997, pg 24[111] ‘See generally; Tax reform.  Let there be no half measures’.  Taxation in Australia. Volume No 1.  No:4.  April 1998.[112] See generally; Aust, Reform of the Australian Taxation System, (Draft White Paper) (Canberra: AGPS, 1975, pg 60).  Edwards, M, The income unit in Australian tax and social security systems, (Institute of Family Studies, 1984).[113] http://www.cpaonline.com.au/html/aa/200006/pg-aa200006-tax.htm[114] Senate Economics  Legislation Committee.  Parliament of Australia.  Canberra, 2000, pg 25.

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 [AGL1]Surely this must be a MARGINAL rate in which case they are not paying 43% of EACH dollar, only those between 38,000 and 50,000.  To achieve an AVERAGE rate of 43%, the individual must be earning in excess of 1,000,000!!!