The Government is on a mission to achieve a better tax system to serve Australia now and into the future – and all are being invited to join the conversation.
The finance minister under Louis XIV’s reign said ‘The art of taxation consists in so plucking the goose to obtain the greatest amount of feathers with the smallest possible amount of hissing.’
High tax rates, unfairness and complexity hold back Australian living standards. With this in mind the Government released its tax discussion paper titled Re:think in Melbourne on 20 March 2015, with an invitation to the Australian community to be involved in a national conversation on tax reform. The end goal is to achieve a better tax system that delivers lower, simpler and fairer taxes. The discussion paper runs to 196 pages and lists 66 questions for consideration.
Australia’s tax system raises revenue to fund important public services like health, education, infrastructure, defense and social welfare payments. Thirty nine (39%) per cent of taxes raised in Australia come from personal income taxes, whilst company taxes make up 19 per cent – staggeringly, just a dozen companies pay around one third of Australia’s total company tax. Meanwhile, GST accounts for 12 per cent of taxes.
Australia has a relatively high reliance on income taxes compared to other developed countries. However this dependence will become increasingly unsustainable with the implications of an aging population becoming a major concern.
Right now there are about 4.5 Australians of traditional working age (between 15-64 years old) for every retiree (aged over 65). By the year 2055 however, this will nearly half to around 2.7 Australians of traditional working age for every person over 65.
Considering that people under 65 years old have historically paid the most in personal income taxes – tax reform is a necessary change for future stability.
Australian tax revenue is drawn from more than 100 different taxes and the Federal Government raises around 81 per cent of total tax revenue in Australia. State and territory governments collect around 15 per cent of tax revenue through stamp duty, payroll and property taxes and receive around 45 per cent of their revenues through transfers from the Federal Government, including all GST revenue.
The Treasurer has said ‘All taxes in Australia are now under increasing structural pressure.’
The need for tax reform is driven by a number of factors including economic costs of a system that was designed in a different era and struggling to deal with multinational trade, increasing global competition for investment, the internet and the digital economy. Also, bracket creep is pushing people onto higher tax rates and the percentage of taxpayers in the top two tax rates is expected to increase from around 27 per cent to 43 per cent by 2024-25.
What’s more, whilst the need to support our community’s disadvantaged and vulnerable is incredibly important, it is another area that will become difficult to sustain without change.
The Social Services portfolio for example, represents over one third of Commonwealth Government funding (just shy of $150 billion each year) and is the biggest spending portfolio.
In terms of reforming our taxes, the Government’s previously stated objective is to deliver taxes that are lower, simpler and fairer:
The Government is committed to keeping taxes lower. Treasury research estimates that for each additional $1 collected in company tax the living standards of Australian households is reduced by 50 cents in the long run because of reduced investment.
Achieving a tax system that is easier to understand and comply with is a major objective.
The current tax system is too complex, with significant resources spent on tax compliance and management. Tax compliance costs are in the order of $40 billion a year.
The tax system should strike a balance between raising enough revenue to fund public services whilst maintaining reward for effort and providing incentives to work and innovate. Australia’s tax and transfer system contributes to fair outcomes, but can discourage workforce participation for some people. The gap between the relatively high top marginal rate and the company rate results in tax planning and avoidance.
Principles for Tax Systems
A well-designed tax system will meet its revenue raising objective whilst balancing the core principles of equity, efficiency and simplicity. This involves fairness in the distribution of the tax burden, efficient tax collection that has the lowest possible cost and a tax system that’s easy to understand and comply with.
Other principles could also be added. The Rudd Government’s 2010 Henry Tax Review (the last major review of Australia’s tax system) emphasised the importance of sustainability, that is, the ability to meet the changing revenue needs of Government and consistency across tax laws and treatments.
As contributing members to Australia’s economy both personally and as business owners, there’s plenty to be gained by Australian Dealers who follow this emerging tax reform conversation. For more information or to make a submission of your own, visit: bettertax.gov.au.
The AADA will also be lodging a submission which considers the implications of tax reform on the multibillion dollar retail automotive industry.