On the road
We're on the road to tax reform, but will we ever arrive at the right destination?
In March this year former treasurer Joe Hockey “opened the conversation” on tax reform by releasing the Re:think tax discussion paper. At the time the government said its objective was to achieve a better tax system that delivers taxes that are lower, simpler and fairer.
In releasing the tax discussion paper, the government outlined a three-step process to tax reform:
- Re:think – We want you to discuss the tax system with us using the discussion paper to start the conversation.
- Re:consider – We want to reshape our tax system and together put forward options for the future. The government will release an options paper for further community consultation on possible reforms to improve the tax system.
- Re:form – The government will work with the Australian people to develop a tax system that delivers taxes which are lower, simpler, fairer.
This reform process was implemented following the release of the 2015 Intergenerational Report, which showed how Australia is expected to change over the next 40 years. It predicted a slowdown in income growth as the Australian population ages.
Australia currently has a relatively high reliance on income taxes, higher than nearly all other developed countries, as well as most of Australia’s Asian competitors, which makes the case for reform obvious. As the population ages, a smaller proportion of Australians will pay income taxes while more people will rely on some form of government assistance.
Theo Sakell, tax partner at Pitcher Partners says reform is needed to ensure the tax system does not inhibit broader economic growth in Australia.
“In fact, the tax system has got to not hinder but enhance and help economic growth,” he says. However, according to Mr Sakell, given the population projections, the current tax mix cannot possibly promote economic growth in the future.
“When you look at the baby boomers retiring, working part time and even stopping working altogether that collection of revenuefrom that base is going to dwindle.
“From a fiscal point of view we need a tax system that will make sure we don’t go broke, a tax system we can afford to have,” he says.
Looking purely at tax collections, the ageing population will diminish the government’s revenue going forward, relatively speaking, he says.
“Australia is quite unusual in one critical respect and that is we have a pretty high income tax collection as a percentage of our total tax revenues.
“The percentage of our gross revenue collections from income tax is a lot higher than GST consumption taxes – and when you drill down within income tax we have a really high take of income tax from individuals, and that’s where the challenge arises,” Mr Sakell says.
Tony Greco, general manager, technical policy, at the IPA says he agrees that Australia’s tax mix needs reforming, stating that it just isn’t suitable going forward. According to Mr Greco, the reliance on income tax is not sustainable and must be addressed. It’s his, and the IPA’s, opinion that the tax mix should be shifted further towards consumption taxes, such as the GST and land tax.
This mix, he says, will not only suit Australia’s changing demographics better, but will increase efficiency in the tax system itself. Efficiency, he says, must be considered at all times when planning reform in the tax system.
When considering a tax: “You’ve got to say whether it’s a good tax or a bad tax, you then look at all the other taxes that you could have that could be classed as efficient and you start to then offset the income tax by the raising of taxes on the other side, the ones that are efficient.
“Everyone is pretty much saying the same things now, so it’s all fairly consistent it’s just that we can’t seem to raise those reforms options at a higher level,” Mr Greco says.
The long journey
Even with widespread support for tax reform, substantial changes to the tax system are never easy, politically.
“There are always losers when you’re tinkering with the tax system and losers are always the ones who are going to scream the loudest,” Mr Greco says.
This explains the government’s slowly-slowly approach to reform. Its consultative three-step process is designed to provide a platform on which the government can take reform to the next election as a mandate from the people. It’s a way the Coalition can navigate the minefield that is tax reform while preserving its political clout.
However, Mr Greco says he is worried this political navigation will result in less than perfect outcomes for the country.
“People are calling it a once-in-a-generation opportunity (for reform) and we do see it like that but we don’t see it happening necessarily the way the opportunity presents itself,” he says.
“It’s not easy, its far safer to plod along and make smaller changes and protect your political goodwill, because it does draw on your political goodwill if you go out and try to tackle this head on; it comes with risk."
Mr Greco says he believes there has been enough consultation already and the government should act now in the best interests of Australia.
“I think there has been enough consultation and there have been enough reviews – Henry’s work [The 2010 Australia’s Future Tax System Review conducted by Dr Ken Henry, former secretary to the treasury] still stands the test of time.
“I think the time for inaction has evaporated,” he says.
Like Mr Greco, Mr Sakell laments the political hurdles tax reform must jump.
“This is the shame, at the end of the day it shouldn’t be about politics and politicians driving this process, it really does require really long-term thinking,” he says.
“These decisions are not for the benefit of one political party and one government for the next three or six years, they are systemic issues.
“The problem with any tax reform process and we’ve seen it with the Henry review and the Ralph review [The 1999 Review of Business Taxation conducted by John Ralph], a lot of good work is done but a lot of it is never picked up or it’s picked up too late or its picked up in drips and drabs.”
However, PwC tax partner Paul Abbey is less sceptical and believes the reform process may still prove successful.
“The fact that we have a tax reform green paper and white paper process happening is a terrific thing,” he says. “We have started to do something, that’s the most important thing; we’ve started to do something!”
However, Mr Abbey says he sees some gaps in the process that have been missed. He believes there has yet to be sufficient communication from politicians about the importance of reform.
“The thing we think is missing in this debate is really driving that message – that for the Australian economy to deliver to individual Australians the real fundamental concerns they have, we need to do something about the tax system because the tax system can be a big contributor to achieving those goals.”
In addition, Mr Abbey says the relevant stakeholders also need to build trust in the tax system and the reform process across the community.
“Right now in the tax debate there is an absence of trust. There is a view that corporate tax payers are avoiding their taxes and multinational organisations are taking advantage of the tax system and that damages trust in the system.
“There is a view that people who are on superannuation are getting advantages which are not warranted and that damages trust in the system,” he explains.
Mr Abbey goes further to say that the reason why some civil society and charity groups are against changes to the GST is because of a lack of trust in the reform process.
“They’re worried about the provision of compensation to lower-income earners, and so because they don’t trust the ability to ensure there’s good compensation and that it is maintained they are against change.
“The absence of trust is completely stymieing where we are going,” Mr Abbey says.
The end in sight
Until the government’s three-step process has played out no one can say where this reform journey will end, but Mr Greco says he hopes whatever happens, it’s in the best interests of Australia.
“Everyone has a view on the future direction of tax policy but you have to go back to basics and say ‘what’s in the national interest?’,” he says.
“How do we revive productivity? How do we revive growth? Because it’s all stalling at the moment. Tax is one of those levers that can be pulled to get us out of this hole and I think that’s what people forget.”
Mr Greco says our current tax system was, for the most part, designed for the 1950s and will not cope with the demographical changes expected in Australia’s population. He also notes the transition in the economy away from the resources boom, saying tax is one of those things that can assist with moving Australia forward.
“I see it as an opportunity to go back to designing an optimal tax mix that supports productivity, economic growth, entrepreneurial activity and competitiveness of the tax system.”
The big thing is to move in a direction that the previous reviews have suggested, Mr Greco says.
“Shifting from an over-reliance on income tax to more efficient consumption taxes is part of it; but it’s not all of it. You’ve got to look at everything else at the same time rather than just one thing. It’s really about getting the optimal tax mix that is going to sustain budgets going forward, is still competitive and improves efficiency.”
Mr Greco says previous reviews of Australia’s tax system have all highlighted the same issues and as such, it’s time the government progressed to a road map of reform with a timeframe and a clear indication of where they see the tax system going. Failing this, he says other options should be considered. “If this process doesn’t produce those sorts of holistic changes that are required then I think we need to consider all of the other options,” he says.
“There is an election and the government has at least stated that they will go into the election with a green paper – it’s just how bold that green paper will be, and whether it does take on those larger reform issues head on.”
If the political system proves too high a hurdle Mr Greco says he hopes change can be brought about in other ways, for the good of the country.
“If the system can’t get it over the line then one option is always to put it to an independent body, which is what New Zealand does,” says Mr Greco.
“If there is bipartisan support to give it to an independent agency and they tackle it with bipartisan support, then there is an option – it’s not necessarily one we have used in Australia but it’s another option to get past the political impasse.”
“Working hard reducing the tax burden"
- The former minister for small business, Bruce Billson MP
All governments across Australia must work together to improve the economic climate for business, and ensure more efficient delivery of government services while keeping taxes as low as possible. So that small businesses are competitive and can focus on growing, we are working hard reducing the tax burden.
Recently this included slashing the company tax rate to 28.5 per cent as part of the historic Growing Small Business and Jobs package.
Also part of the package is the $20,000 asset depreciation measure. New businesses can also claim professional start-up costs, and there is no capital gains tax obligation when a small business just wants to change legal structure.
The [former] Abbott Government is reducing compliance costs for taxpayers by $56 million a year by making changes to the way tax obligations are met and reported.
For example, an estimated 447,000 small businesses are benefiting from changes to entry thresholds for PAYG instalments, reducing their compliance costs by $67.3 million per year.
45,000 small businesses that have no GST reporting requirements no longer have to lodge a business activity statement, where, to date, lodgements have been made only to report PAYG instalments.
402,000 small businesses with modest or negative incomes that are required to lodge a business activity statement no longer have to interact with the PAYG instalment system.
It is crucial our hardworking entrepreneurs fully engage in the tax reform process to ensure any future changes take into account small business unique challenges and opportunities.