By Bruce Quigley, CTA, Senior Adviser
Earlier this week, the Tax Institute made a pre-budget submission (the submission) to the Treasurer the Hon Josh Frydenberg MP.
The submission observed that to achieve a structurally sound Australian tax system, one must cast an honest and critical eye over the current system and decide whether all the current features should remain or should some be removed in favour of new or modern features that better support Australia’s economic needs. This requires the Government to look at where trade-offs can be made in the tax base to ensure Australia has the requisite tax system to support the Australian economy into the future.
The submission highlighted many of the recommendations and observations made in the Australia’s Future Tax System – Report to the Treasurer (Henry Review) released in December 2009 which are just as relevant today.
The Henry Review clearly demonstrated that 10 taxes contributed to 90% of Australia’s revenue take and that 115 taxes only contributed 10%. The submission advocated that proper consideration needs to be given at all levels of government to repealing the 115 taxes that do not contribute much to the revenue base. Tough decisions would need to be made. A contentious matter would be, for example, repealing fringe benefits tax – where there would be a trade-off between the loss of a small amount of revenue, and the large compliance saving for taxpayers and the ATO.
Australia’s current tax mix is out-of-step with our counterparts in the OECD. We rank 2nd highest (in 2016) for taxes on income, profits and capital gains, while we rank 34th out of 36 countries in terms of the share of revenue from GST/VAT. The submission recommended that the effects of the discrepancy between Australia and other OECD countries could be mitigated by the Government adopting a policy of shifting away from being as dependent on income tax for the bulk of revenue collections towards more simple and efficient consumption taxes.
The submission recommended that the personal income tax base should be simplified by adopting some of the recommendations of the Henry Review. The submission recommended that:
- There should be a transparent personal marginal tax rate system (unlike now) so that individuals can clearly identify which marginal tax bracket they fall into and therefore what tax rate they face.
- In the short-term, a standard deduction for work-related expenses should be introduced together with the option to claim actual expenses properly substantiated for employees with expenses above the standard threshold. The submission made clear that the Tax Institute does not generally endorse caps on specific deductions, such as for the cost of managing tax affairs. Such caps are selective and distortionary.
- A medium goal could be to adopt recommendation 12 in the Henry Review of tightening the nexus between the deductibility of expenses and its role in producing income.
Australia’s corporate tax rate is the second highest in the OECD. In addition, our dual tax rate system adds unnecessary complexity to the corporate tax rate system. The submission advocated that a tax rate of no higher than 25% should apply to all companies irrespective of their aggregated turnover.
Only 13% of revenue in Australia comes from GST compared with the OECD average of 20%. We have the fourth lowest GST/VAT rate in the OECD and a plethora of concessions and exemptions. There is a trade-off between making GST concessions and exemptions available for certain classes of taxpayers and the increased revenue that could be obtained from removing them. The submission recommended that a comprehensive review of the current exemptions and special rules in the GST law which impact the size of the GST base should be undertaken.
It remains to be seen whether the Government has the political courage to adopt the recommendations (any?) in the submission. Experience tells us that fundamental and holistic tax reform is unlikely. However, the Tax Institute will continue to advocate for a more structurally sound tax system to support a strong economy for a better future for all Australians.