20. Tax Reform

Joshua Easton

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The 2015 Intergenerational Report made for some sobering reading.


It offered insights in Australia’s future and its implications for the fiscal health of the Federal Government and the case for tax reform.


The Intergenerational Report explores where we will be in 2055, how will we be dealing with a rapidly ageing population and indeed how we will deal
with substantial population growth.


Tax reform which impacts on revenue collection will play a crucial role in sustainable future Federal Budgets.


Make no mistake…nations who have failed to think strategically, properly consider taxation reforms and then responsibly deal with government expenditure,
now face very challenging times.




The tax discussion paper, released on 31 March 2015, began a dialogue on how we create a tax system that supports higher economic growth and living
standards, improves our international competiveness and adjusts to a changing economy and new opportunities.


The Intergenerational Report does illustrate that Australia needs to take continued steps to boost productivity and encourage higher workforce participation
to drive future economic growth.


Tax reform is a critical part of the Government’s policy to create jobs, growth and opportunity.


The problem we face is that our current tax system, which was designed before the 1950s, is ill-suited to the 2050s.


Because of changes driven by globalisation and the rise of the digital economy, Australia’s heavy reliance on income taxes may be unsustainable.This
over-reliance is projected to increase further, largely as a result of wages growth leading to individuals paying higher average rates of tax (bracket


According to former Federal Treasurer Joe Hockey:


  • Around 300,000 Australians are expected to move into the second highest tax bracket over the next two years.


  • In just 10 years, nearly half of all taxpayers will be in the top two brackets – an increase from around 27 per cent today to 43 per cent in 10
    years’ time.
  • In Australia about 70 per cent of Commonwealth tax revenue is collected from personal and company income taxes.
  • A dozen companies pay around one third of Australia’s company tax.
  • The rise of the digital economy and globalisation presents significant challenges for the effectiveness of the tax system.
  • Capital is more mobile, and we need a competitive corporate tax regime to encourage investment.Multinational corporations operate across many jurisdictions
    and that means it can be difficult to determine where tax should be paid.
  • The Intergenerational Report highlights the need for a tax system that can support a growing and ageing population while there is a decline in
    the number of traditional working age Australians to fund services.
  • Australia can’t risk falling behind.Many of Australia’s international competitors are changing their tax systems to make them more competitive.
  • The Government must build a tax system that delivers taxes that are lower, simpler and fairer.
  • The Community’s responses will inform the Government’s tax options Green Paper, which was due to be released in the second half of 2015.The Government
    was to seek further feedback on those options before putting forward policy proposals for consideration by the Australian people in 2016.


A detailed analysis of the Discussion paper is beyond the scope of this publication.It is very clear that Treasury has put the issues out there without
offering solutions – we suggest these are a matter for public debate, hopefully leading to some consensus.


This has been the successful model for taxation reform in New Zealand.


We note that bracket creep was addressed, to a degree, in the May 2016 Budget with the threshold for the second highest rate of individual tax (37%)
increasing from $80,000 to $87,000 for the 2016/17 year. The May 2018 budget has also considered bracket creep, with its new tax scales to be phased
in over 7 years.




The tax reform white paper was abandoned by the Government in the heat of the July 2016 Federal Election.


Many of the initiatives in the 2016-17 Federal Government budget have been received positively.


Indeed, the superannuation reforms crack down on tax avoidance and tax relief for small to medium sized business have been covered in depth in earlier


However, as Alex Malley, then Chief Executive of CPA pointed out in his budget summary:


“The combined impact of these initiatives is a long way from presenting us with anything like the leadership Australia needs to ensure we can enhance
our competitiveness against increasing global headwinds.


Tax change is not tax reform.The budget is about setting up an election campaign.It is yet another lost opportunity for real reform on top of a decade
of lost opportunity.”


Of course, Mr Malley is 100% correct and in the interests of fairness, we point out that both sides of politics have shared power in the last decade.The
last time a candidate went to a federal election campaign with a comprehensive tax reform package was in 1993 when John Hewson lost the unlosable


The Business Council of Australia’s (BCA) then President Mr Michael Chaney took a similar view to the CPAs when he said the BCA welcomed the government’s
recognition that Australia needs a commitment to ongoing structural reform, and that it has adopted the BCA’s recommendation of a reduction in
personal tax rates, as well as changes to tax thresholds.


“But the tax reform statement, while providing an excellent summary of past achievements, does little to lay out a strategic tax reform agenda beyond
the forthcoming year.


There is no better time than now for Australia to make the strategic decisions and investment needed for future growth.Many of the initiatives are
sound responses to immediate pressures on our economy and its competitiveness, but over the next 12 months, it will be imperative to achieve greater
progress toward more permanent, structural changes to the economy.”


Once again, the BCA reiterated its call for a more strategic approach to tax policy rather than piecemeal changes aimed at catching up.


Once again both sides of politics would argue they are currently seeking a mandate from the Australian public to implement changes.


We have deliberately retained the discussion of the White Paper because even though it was abandoned by the Government, it properly addresses the issues
Australia faces and will probably serve as the basis for further taxation reform when the time is right.


We note the key results from the BDO Australia’s 2016 tax reform survey:


After getting so close to genuine tax reform through the Tax White Paper process many businesses felt cheated by its abandonment and were fearful the Federal Budget would present only piecemeal measures and a vague commitment to look closer at tax reform after the election.


Some of the key survey findings include:


  • 80% of respondents agreed a review of the GST is essential to any discussion of tax reform.
  • 85% agreed state stamp duties are a significant impost on business and reduce the mobility of the population by discouraging the sale of residential
    and business real estate, and other business assets.
  • 59% agreed that a reduction in the corporate tax rate would improve the Australian economy by encouraging companies to invest and employ more staff
    – up from 50% in 2015.
  • 47% of respondents agreed the adoption of OECD’s BEPS initiatives was an appropriate way of discouraging companies from avoiding taxation in Australia,
    although about the same number had a neutral view, potentially indicating a lack of knowledge about the issue.




The May 2017 Federal Budget contained no meaningful tax reform.


It remains a looming issue as bracket creep takes more and more Australians into higher tax brackets. The release of Parliamentary Budget Office figures
in July 2017 predicted:


  • The average income tax rate on incomes will rise from 22.7% (2016) to 25.9% predicted by 2028;
  • The share of individuals on the top marginal rate (47%) would rise from 3% to 7.3% in a decade.


Nothing changes at a state level as Treasurers from states such as NSW and WA continue to urge reform over the allocation of GST revenue. GST reform
is essential, and we would point out the average rate of comparable consumption taxes in OECD nations is 15%, compared to Australia’s GST rate
which is 10%.


Our near neighbour New Zealand has done much better than us on tax reform but is not hamstrung with a Senate (no upper house) and they do not have
state governments to deal with.


Tax reform is inextricably linked to politics and the truth is that our political system makes meaningful change difficult.


It isn’t all negative – Australia has stable tax bases and our Politicians have shown the will and vision to carefully consider the future global environment
and demographic change when formulating revenue policy.


We will keep you informed on developments as they occur.


2018-19 BUDGET

There appears to be consensus that the May 2018 Federal Budget contained little in the way of meaningful tax reform, given the electoral cycle this
is hardly surprising.


Research done by leading ‘Big Four’ accounting firm PwC indicates a large part of the solution is broadening and increasing the rate of the GST, while
making sure that Australians are adequately compensated for this by lower individual tax rates or higher Centrelink payments.