Tackling tax down under
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7 October 2013
Tax reform is on the agenda in Australia as the government seeks ways of funding pensions, reports Louise McBride. Louise McBride is a tax partner at the Sydney office of Clayton Utz. Australia's taxation system is in danger of imploding. Without urgent reform, it will not be able to support the number of people who draw pensions, grants and wages from the public purse. For every Australian employed in the private sector, there are 1.1 others who depend on the government sector.
The current tax system relies too heavily on levying taxes on personal income and it burdens the community with an enormous amount of legislation which is difficult to understand and costly to administer.
But the real danger is that, unless something is done quickly, the revenue raised from taxation will fall short of what is required by the federal government to provide for its welfare, health and education programmes.
Given this, the recent decision by the Australian government to make tax reform a priority is timely. It is also courageous. Tax reform is hard to sell. It is fraught with political and fiscal danger. Ultimately, such reform depends on the willingness of voters to accept change.
The overall thrust of any tax reform programme must be to shift the tax burden from the individual and to reduce the government's excessive reliance on income tax. But before the government introduces any new tax, such as the much-discussed goods and services tax (GST), it must implement a broad reform of the existing legislation to make it fairer, simpler and more efficient.
If Australian companies are to compete in an increasingly global economy - and if Australia is serious about becoming a regional headquarters - the corporate tax rate must be reduced from its present level of 36 per cent. Australia's individual tax rates must also come down. The highest of these - 47 per cent - kicks in on incomes above AUS$50,000.
Traditionally, Australian companies have been given a tax incentive because of their ability to move jurisdictions. But in the electronic age, individuals can also move jurisdictions. So there is justification in both groups sharing a low flat rate of tax, which not only encourages entrepreneurial activity and taxpayer compliance but ensures that Australia is competitive in the global market.
The country has a significant black market economy and flourishing tax minimisation industries. The most constructive way of reducing these ills is to lower tax rates, thereby encouraging people - and companies - to focus on productive work or investment rather than on tax reduction measures.
But a simple, efficient and fair tax system must not be produced at the expense of low income earners. The tax-free threshold must be increased to a level that will exempt low-income earners from income tax. If the government lowers the income tax rate for individuals and companies, and increases the tax-free threshold to a level that exempts low-income earners from paying income tax, public fears about another increase in the tax rate by the introduction of GST can be allayed.
GST's biggest drawback is that poor families would pay more tax on all they buy. Since the poor consume most of their income, their average rate of tax would be higher than that of many rich people. But by increasing the tax-free threshold so that the poor do not pay income tax, the effects of GST would be offset.
Such a move would also allow essential goods such as food to be included in the tax base and for the GST rate to be kept constant at about 10 per cent.
Obviously, the introduction of a VAT-style GST must be accompanied by the abolition of the current wholesale sales tax and company payroll tax. Ideally, reform would also include an expanded definition of income and the eradication of most tax deductions permitted for a wide range of company and individual expenses.
Hopefully, the government will expand the definition of income so the taxable capacity of individuals and companies will be tied to the wealth realised in a particular year of income.
The plethora of deductions not only adds to the general complexity of Australia's taxation system but also distorts investment decisions. This is costly in terms of economic efficiency. A GST, without broad reform, would merely expand the existing regime and further cripple a nation once regarded as the "Lucky Country".