AADA’s submission to the Treasury Tax White Paper Task Force addressed a number of issues relating to tax reform and called on the Government to abolish the Luxury Car Tax (LCT)
The Government’s tax discussion paper, Re:think, invited Australians to join in a national conversation on tax reform. The Government says that it is committed to a better tax system to deliver lower, simpler and fairer taxes.
In its submission, AADA noted that the biggest challenge facing the Government is managing the politics of tax reform and it recalled the words of a leading tax scholar: ‘tax is politics with a dollar sign in front’.
Issues like effectively handling the goods and services tax (GST) as well as the sensitivity around superannuation may hinder the process of ‘genuine’ tax reform.
AADA noted that a key issue to address (and reform) is the financial relationship between the Commonwealth, States and Territories. That is, the degree of vertical fiscal imbalance (VFI) and horizontal fiscal equalisation (HFE).
VFI refers to the mismatch between the expenditure responsibilities of the States and Territories relative to the revenue raised, making them reliant on Commonwealth government funding in areas such as health and education. HFE is the mechanism to reduce fiscal disparities between the States and Territories to allow for an equivalent level of services to all Australians – regardless of where they live in the country.
Goods and Services Tax
GST revenue accounts for 12 per cent of Federal tax revenue. State and Territory Governments receive 45 per cent of their revenue from the Commonwealth Government.
Under the Intergovernmental Agreement all GST revenue is distributed and it is unlikely the base and rate of GST will change unless there is unanimous agreement between all the States and Territories.
Equitable distribution of GST revenue is a challenge, including the complexity of State and local governments to make up revenue shortfalls increasingly through ‘quasi taxes’.
There are over 100 different taxes in Australia, but the majority of revenue is collected from just a handful – including 81 per cent from individuals and corporations.
AADA referred to a recent CPA Australia report and modelling which examined the impact of GST changes to the rate and base. This clearly demonstrated benefits to Australia’s GDP while at the same time acknowledged the challenges facing the Government. The Business Council of Australia also estimates that GST exemptions cost more than $20 billion in foregone revenue, compared with GST revenue of $50 billion per year.
AADA called on the Government to present a range of options for consideration through modelling which shows the effects of broadening the base and increasing the rate of GST.
Personal income tax is the major source of Government revenue accounting for around half of tax receipts. Income tax thresholds are not indexed to inflation, meaning individuals will face higher average tax rates even if their income has only increased due to inflation.
The Better Tax discussion paper stated between 2014-15 and 2024-25, the percentage of taxpayers in the top two tax brackets (taxable incomes in excess of $80,000) is estimated to increase from around 27 per cent to 43 per cent under current policy settings.
Media reports confirmed by the Treasury estimated that over 2 million more taxpayers will be in the third income tax bracket (taxable income from $80,000 to $180,000) in 2024-25, compared to 2014-15. Moreover, it is estimated there will be around 750,000 more taxpayers in the fourth tax bracket (taxable income above $180,000) in 2024-25 compared to 2014-15. It is estimated that about 80 per cent of the rise in revenue in the 2015-16 budget would come from bracket creep.
AADA contended that the excessive burden on individual taxpayers through bracket creep is not sustainable and bracket creep mitigation should be funded from other reform measures and structural changes to Government spending.
Australia’s corporate tax rate of 30 per cent is higher than the OECD average and many countries in the Asia-Pacific region.
AADA noted that while a lowering of the corporate tax rate could increase overseas investment, there are many factors to consider including the need to respond to a global perception that the corporate tax rate is too high at a time when many other countries are lowering the rate.
The Australian government collects a range of indirect taxes levied on specified goods and services including fuel taxes, alcohol taxes, tobacco tax, the LCT, agricultural levies and tariffs.
These selective taxes should, according to the report on Australia’s Future Tax System (the Henry review), be imposed for one of three purposes:
• to improve market or social outcomes;
• to help counteract self-control problems (in the special case of alcohol); and
• to improve market efficiency through appropriate price signals.
The Henry review stated ‘Revenue should be a by-product of such taxes, not the reason for them.’ It also noted the LCT discriminates against a particular group of people because of their tastes. It is a complex and ineffective way of distributing income from rich to poor.
AADA’s submission included a discussion on the case for abolition of the LCT which you can read more about on page 16. AADA believes that tax reform cannot take place without harmony between the Commonwealth and States, who should agree to act responsibly to ensure budgets are not in structural deficits over the long-term.