AUSTRALIA needs tax reform to prevent millions of people experiencing bracket creep, according to a government discussion paper on the challenges facing the tax system.
The "Re:think" discussion paper, which calls for "lower, simpler, and fairer" taxes does not rule any specific reforms in or out. It is the start of a process that will see the Coalition take proposals for tax system changes to the next federal election in 2016.
It flags Australia's high reliance on income taxes (both personal and company), system complexity, the "high top marginal tax rate," and the differential treatment of bank versus superannuation savings as some of the issues it hopes to generate a "national conversation" on.
Other controversial issues the paper canvasses include negative gearing, the goods and services tax, the low value GST threshold on imported goods, and the fairness of the tax system.
The paper introduces the idea of a "tax complexity metric" that would measure relative complexity over time and help government assess the areas of tax law most in need of simplification.
The government has established a website to help make the case for reform, and via which the public can have their say - the deadline for submissions is June 1, 2015.
Overview: Miranda Stewart, Professor and Director, Tax and Transfer Policy Institute, Crawford School of Public Policy at Australian National University.
The paper emphasises Australia's reliance on personal and company income tax, with a main focus on negative impacts on workers and investors, and a goal of international competitiveness. It highlights the challenges of a "digital" economy for all kinds of tax. Other challenges - especially of fiscal sustainability, inequality and the environment - receive less attention.
In spite of the call for a broad conversation, the issues paper is highly technical and is unlikely to engage most Australians in a tax debate. Still, its breadth and the wide range of topics covered is to be applauded.
The paper emphasises goals of efficiency, fairness and simplicity, and refers to past tax reviews. While it does not explicitly build from recommendations of our last major review - the Henry Tax Review - discussed in TTPI's recent Stocktake Report - many of the issues raised were seen as important in that review.
The paper explains many gaps and complexities in the personal income tax system - for example, in taxation of fringe benefits, deductions and different legal entities. It points to uneven and complex taxation of investment and savings returns, including home ownership, real estate investment and superannuation. It also points to the exemptions in the GST base and how these are not targeted to low income earners - unlike our individual income tax and social security system. It even includes a reference to estate taxes.
The paper points to the opportunity of reforming Australia's federation at the same time as the tax system. Indeed, these are inextricably linked and Australia's last major reform - introduction of the GST - did precisely that. Reforming state taxes could deliver a significant boost to the economy. The goal must be to strengthen and stabilise state revenues, through stronger and more efficient state taxes and more certain allocations of federal taxes - this needs Commonwealth financial support. Most recent tax reforms have been broadly revenue-neutral, with substantial compensation packages. How to fund reform with "lower taxes" in an era of fiscal deficits is not clear. But first, we need to understand where we want to go with tax reform. This paper is an important start. The government should now take the lead in building bipartisan engagement, and engagement with the states on the key goals for tax reform.
GST low-value threshold: Kathrin Bain, Lecturer, School of Taxation ＆ Business Law, UNSW Australia Business School
The issues paper highlights the fact that Australia's GST coverage ratio of 47% is lower than the OECD average (55%). As noted in the paper, the exemptions reduce the efficiency of the tax and increase its complexity.
One exemption area is the low-value threshold which applies to goods imported into Australia with a value of A$1,000 or less.
The low-value threshold is high by international standards, and is seen to put Australian retailers at a disadvantage. In 2011, the Productivity Commission found strong in-principle grounds for lowering rather than removing the GST low-value threshold. The Productivity Commission found whilst removing the threshold would increase tax revenue by A$600 million, the cost in collecting that additional revenue would be A$2 billion.
The issue then becomes seeking an alternative method to collect GST on low-value imported goods that has lower collection costs. In March last year Joe Hockey announced he had agreed to a request from states and territories to explore options to lower the threshold. However, in September 2014, he said: "States indicated today that they had not agreed a preferred workable approach on this issue. The States may choose to raise this as part of the Tax White Paper process."
The tax issues paper adds little to the discussion of the low-value threshold, however does list "GST and the digital economy" as one of the current pressures on the GST base. It seems likely that the through the tax white paper process, the government will look at ways to increase GST revenue, whether it is through increasing the GST rate or expanding the base through removal of exemptions. The removal or lowering of the low-value threshold would make the tax system fairer, by putting international retailers on equal footing with Australian suppliers, and it is therefore possible that this change to the GST system would receive political support from the federal opposition and the State governments. However, it makes no sense to do this unless a more efficient method of collecting GST on imported goods is proposed.
The issues paper notes that both the OECD Global Forum on VAT and the OECD Committee on Fiscal Affairs are investigating the taxation on imported services and low-value goods, and it may be a case of the Australian government looking to the OECD for suggested solutions to the issue. However, unless the states agree on an approach to lower the threshold, with associated change in the collection mechanism, I do not see the threshold lowering anytime in the foreseeable future. While it may put Australian retailers at a disadvantage, the additional GST revenue that would be collected is only a fraction of the GST revenue foregone through the exemptions on food, health, and education.