Time to Re:think the Australian tax system?

Strategies

Monday 13 April 2015

On 30 March 2015, the Treasurer, the Honourable Joe Hockey, released Re:think - Tax Discussion Paper (Discussion Paper).

The Discussion Paper does not recommend specific changes to Australia’s tax system - it is intended to generate discussion on the future direction of Australia’s tax system.

The following key discussion points raised in the Discussion Paper are particularly relevant to financial services professionals and their clients.

Taxation of income from savings

The Discussion Paper outlines the disparity in taxation between different forms of income from savings (eg interest, franked dividends and rental income).

The dividend imputation system contributes to the present disparity, along with imposing compliance costs on both taxpayers and the Government. Further, it creates a bias for Australian resident taxpayers to invest more of their savings in Australian shares than other investments (eg foreign companies).

An option to address this disparity is to introduce one standard rate of tax for all forms of income from savings. Income from savings would be taxed separately to other income (eg employment income). The treatment of deductions in respect of savings income would also need to be reconsidered.

Other jurisdictions were cited in respect of their taxation treatment of dividends, including:

  • the UK - partial imputation credit
  • Norway - no imputation and exemption from shareholder taxation on dividends
  • Germany - taxation at the company and shareholder levels.

Examining the fairness of superannuation

Projections in the recent Intergenerational Report (Australian Government 2015) suggest that the number of Australians aged 65 and over is expected to more than double by 2055. This, along with an expected decline in the workforce due to an aging population, places a heavy reliance on the superannuation system.

Among existing savings vehicles, superannuation is attractive due to it's low rate of tax - contributions and earnings are taxed at a flat concessional rate of 15%. It follows that high income earners receive the greatest tax benefit relative to their marginal tax rate (of up to 49%, including the Temporary Budget Repair and Medicare levies) when investing their savings through the superannuation system.

The Discussion Paper recognises that disparity and planning opportunities exist in the superannuation system, reiterating the recommendations made in the Henry Tax Review (Australia’s Future Tax System Review, Australian Government 2010). The Discussion Paper raises the issue of differential earnings tax rates across the accumulation (15%) and retirement (0%) phases, as well as the distribution of superannuation tax concessions.

Employment related expenses

A high proportion of taxpayers claim tax deductions across a wide range of workplace related expenses (WREs), adding complexity to the tax return process.

Many options are available to address this issue, however the Discussion Paper recognises the need to balance compliance costs and complexity with any cost to the general revenue of the Government.

The Discussion Paper proposes a number of options to address this, including:

  • no deduction for WREs. New Zealand ’cashed out’ WREs for a reduction in the income tax rate in exchange for disallowing WRE deductions in the late 1980s
  • specific deduction for WREs. The UK only allows a WRE to the extent that it directly relates to the production of assessable income
  • standard deduction for WREs. The former Labor Treasurer, Wayne Swan, proposed a standard deduction of $500 per taxpayer in 2010, however the proposal did not progress through Parliament.

Examining the GST rate

Since 2002-03 revenue from the goods and services tax (GST) has declined relative to the size of the economy (in GDP terms). This is predominately attributed to an overall decrease in household consumption relative to GDP. Further, in 2012, the GST was applied to only 47% all goods and services consumed, compared to 56% in 2005.

Australia’s GST rate is one of the lowest among develop countries and is roughly half of the average rate among Organisation for Economic Co-operation and Development (OECD) countries.

The Discussion Paper identifies the possibility of increasing the GST rate above 10% or a broadening of the range of goods and services to include items that are not currently subject to GST, such as education and health care.

The $1,000 GST-free threshold on imported goods was also revisited, particularly in regard to online retail spending. Without reform, this could increase foregone GST revenue and affect the competitiveness of domestic business over time.

The Discussion Paper acknowledges that GST reform is a contentious issue and reiterated that any changes to the GST will require unanimous agreement by all State and Territory Governments, as well as both Houses of Federal Parliament.

Income splitting

Income splitting occurs where income is attributed to more than one individual, or is distributed across multiple income years, in order to utilise more than one tax-free threshold.

The Discussion Paper considers a couple with a household income of $100,000. If only one person earned this income, the tax liability would be $26,947. However, if each of the couple earned $50,000, the tax liability would be $8,547 each (totalling $17,094). The couple would be better off by $9,853 if their income was split.

The Discussion Paper raises the idea of legitimate strategies to reduce the amount of tax paid by individuals within a household, without reducing their actual income, while staying within the boundaries of the general anti-avoidance and other integrity rules.

Tax treatment of real estate

The Discussion Paper explores the role that tax plays in driving investment in real estate and its impact on housing supply and affordability. This includes negative gearing and the capital gains tax (CGT) discount on disposal.

The Discussion Paper suggests that it is the 50% discount for Australian resident taxpayers on the capital gain on sale of the property, which largely drives investment in real estate, rather than negative gearing. However, it does question whether negative gearing should be allowed to continue.

The Discussion Paper also addresses the inefficiencies of stamp duty on conveyances, which discourages housing turnover. A broad-based land tax is an option also raised in the Discussion Paper.

Bracket creep

Marginal tax rate ‘bracket creep’ moves taxpayers on to higher marginal tax rates with rising incomes over time. The Discussion Paper notes this has become a growing issue that impacts upon workplace participation.

It is projected that the percentage of taxpayers in the top two tax brackets will increase from 27% in 2015 to 43% in 2025. In addition, bracket creep affects lower and middle income earners proportionally more than higher income earners. Addressing this issue involves consideration of the fundamentals of the Australian tax system, including marginal tax rates, tax concessions and tax offsets.

Future of lodging a tax return

Since 1990, the Australian Taxation Office (ATO) has offered its Electronic Lodgement Service to tax agents, while e-tax has been available to individual taxpayers since 1999. Pre-filling electronic tax returns has been in place since 2004-05, with most taxpayers who lodge electronically using the prefilling service.

MyTax was offered in 2014 for individual taxpayers with relatively simple tax affairs. Similarly, the ATO has embraced digital information solutions for small businesses through its Small Business Assist initiative.

The ATO continues to seek opportunities for technology to improve the experience of taxpayers when interacting with the tax system including faster, more convenient and more reliable services, as well as lower long-term administration and compliance cost for taxpayers.

This reiterates the comments made in the ATO document Program Blueprint (Australian Taxation Office 2015), which raises the idea of a minimal or low touch tax return experience.

Further information

Submissions on the Discussion Paper are due by 1 June 2015. Submissions received will assist the Government preparing its tax options Green Paper, proposed to be released in the second half of 2015.

The Discussion Paper and any further information can be accessed from the Government’s Re:think website

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