The old chestnut – principle-based drafting vs detailed black letter law

written by Robert Deutsch CTA *

I often ponder whatever happened to principle-based drafting, a concept we heard about some 15 years ago and which was meant to be the prevailing mantra in the development of tax legislation.

However, reality has turned out to be much different, such that the legislation these days is developed with often very little said about the principles that underpin the legislation, but instead an elaboration of detailed rules essentially covering the minutiae of almost every aspect of the law.

Two classic examples of this modern trend are the current formulation of the capital gains tax (CGT) rules and the fringe benefits tax (FBT) rules. Capital gains tax covers some 400 plus pages of detailed legislation while the FBT has a more modest, but still formidable, 250-plus pages of detailed legislation (excluding the Regulations).

One cannot help but wonder if all this is necessary. The views of our members in this context are very much welcomed.

Would it not be more logical and helpful to turn back the clock to a principle-based statement in the legislation that might run to 4 or 5 pages, with the detail being formulated through judge-made law but accompanied by comprehensive binding provisions that would be contained in non-legislative form. A possibility that springs to mind is that this detail could be provided in the Law Companion Ruling which would be developed by the ATO in detailed non-partisan consultation with interested parties and bodies.

In the context of capital gains tax, for example, the law would state that:

“In the case of individuals, 50% of any capital gain derived in a year of income shall be included in the assessable income of the relevant taxpayer. The capital gain would be calculated by deducting all the relevant costs associated with the acquisition of the asset from the proceeds derived from the sale of the asset."

The Law Companion Ruling, or whatever other instrument is to be used, would then spell out to the extent desired, matters of timing and the specific content of the two broad components in the calculation. If anything was missing, that would be determined by judges in accordance with the development of the common law.

The myriad of other CGT events which are currently covered by the 400 pages of legislation could be dealt with by specific legislation similar to what I have outlined above, but again without any of the specific detail.

Still, in the context of capital gains tax, a number of the so-called CGT events have nothing to do with capital gains tax and should be excluded from the CGT law and dealt with, if necessary, elsewhere.

We have developed 400 pages of legislation, of which about 350 pages deal with uncommon situations that are largely of no relevance to 95% of the population. In other words, we have allowed the needs and interests of the very limited minority to overwhelm the needs and interests of the very significant majority.

In the context of FBT, again the concept or principle could be simply stated on the basis that:

“A fringe benefit derived by a taxpayer in a year of income shall be included as part of the assessable income of the taxpayer for that year of income. In calculating the fringe benefit, the amount of the benefit will be equal to the market value of the benefit, if there is such a market value. If there is no such market value, a reasonable estimate based on documented figures must be made of the value to the taxpayer of that benefit."

Again, the detail (particularly about valuation rules and different types of fringe benefits) could be picked up in the Law Companion Ruling or other instrument and developed through that process.

I suspect that reversing the trend in relation to legislation already in existence is a fanciful idea but, in the development of new legislation, I would like to see a stronger emphasis on the principles that apply and less emphasis on the detail, which should be left to other non-legislative instruments that are nonetheless binding on the ATO and taxpayers.

* Robert Deutsch is The Tax Institute’s Senior Tax Counsel. This article was first published in the 2 March 2018 issue of the Institute’s member-only TaxVine newsletter.


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