September 1, 2015

Tax cuts – too good to be true?

Daniel Breheny, Director

Last week, Commonwealth Treasurer Joe Hockey talked about bracket creep and the potential to reduce personal taxes. Bracket creep comes about when inflation and higher wages push people into higher tax brackets.

The Treasurer believes that government must give periodic tax cuts to provide the incentives that reward effort.

Before we get too excited, in 31st August’s Financial Review, Federal Finance Minister Mathias Cormann said any income tax cuts would be part of a broader reform package which potentially could involve an increase in the goods and services tax.

The NSW Liberal government and SA Labour government have been calling for an increase in the GST rate from 10 – 15% with income tax cuts for certain tax payers as compensation.

As always there seems to be a balancing act going on. The government has been in revenue raising mode as economic times become more difficult. The RBA has reduced interest rates to stimulate growth however has had to be mindful of an overheating property market (at least in Melbourne and Sydney) potentially stimulated by historically low interest rates. Business groups would like to see company tax rate cuts before personal tax cuts and as the difference between the top marginal tax rate and company tax rate widens there is more incentive to use tax effective structures such as Trust and Companies, much to the dismay of the ATO.

I believe that eventually the rate of GST will increase or at least the base on which the tax is collected will become broader. If the GST is applied to all goods and services this would simplify the tax and so long as personal tax rates reduce and the appropriate level of compensation is provided to those who can least afford to pay (through tax rebates or increased pension payments) then maybe this wouldn’t be such a bad thing. The real test is whether the government would reduce personal taxes significantly enough to offset a GST increase or whether they would see this an opportunity to collect more taxes.

One thing is for certain, the tax reform debate will go on and will be a hot topic in the lead up to the next election.

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