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Ad hoc tax changes will spur butterfly effect

One mid-tier has cautioned against further tinkering along the fringes of the tax system, warning of the potential butterfly effect on the greater economy.

Ad hoc tax changes will spur butterfly effect
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Following the government’s recently released Productivity Commission report, BDO national tax director Lance Cunningham said making tweaks to the edges of Australia’s tax system would trigger the butterfly effect, a concept that states that “small causes can have larger effects in chaotic complex systems".

“Applying this [concept] to Australia’s complex tax system, one change in one type of tax can distort the economy if you’re not careful,” Mr Cunningham said.

“Therefore, tinkering at the edges of our complex tax system can have unintended results.

“We need a truly meaningful review of the Australian tax system that covers all federal and state taxes.”

Mr Cunningham believes the GST is one of the more important aspects that should be included in a broad tax reform, despite its omission from the Productivity Commission report.

“GST is one of the more efficient taxes that is underutilised in Australia,” said Mr Cunningham.

“If the GST rate was increased and coverage widened it could replace a number of inefficient or counterproductive taxes like payroll tax, which is seen as a disincentive to employing more staff.

“On that note we also need to greater educate the public about the process of tax reform as has successfully been the case in New Zealand, which has used public consultation to successfully increase the GST to 15 per cent in recent years.”

Similarly, HLB Mann Judd tax partner Peter Bembrick insisted that tax reform was overdue, and was critical of the “ad hoc basis” approach the government was adopting to boost its favour in the next election campaign.

“Not since the early 2000s, in the wake of the Ralph Report, have we seen major tax reforms of the scale and impact of the tax consolidation regime and introduction of the GST,” said Mr Bembrick.

“An area we would like to see given serious attention – a review of the GST system, is something that always seems to fall into the ‘too hard basket’.

“Firstly, consider an increase in the GST rate to, say, 15 per cent to ease the income tax burden through increasing personal tax rate thresholds, at least in part addressing the dreaded ‘bracket creep’,” he added.

“Secondly, we would like consideration of a broadening of the GST base so as to spread the GST cost as widely as possible. In this respect New Zealand has long been the poster child, and the most obvious difference between our system and theirs is our GST-free treatment of fresh food.

“Simply removing this exemption, with appropriate compensation to welfare recipients, should increase the efficiency of our tax system by shifting more of the focus of taxation away from income and on to spending.”

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