April 22, 2015

Treasury Paper on Tax Reform Summarised

A tax discussion paper called “Re:think” was released on 30th March 2015 by the Treasurer, Mr Joe Hockey. It outlines what the Treasurers offices sees as the challenges the Australian tax system faces, the way it currently operates, potential opportunities for reform and some of the trade-offs that would need to be considered. At a mammoth 205 detailed pages, it’s a huge read, so we’ve summarised some of the key points for you.

It is important to note that the Discussion Paper is a consultation document that will provide the backdrop to an ongoing tax policy debate and that there are no recommendations or proposals in the Paper.

The Discussion Paper notes the following general themes about the current tax system:

  1. Both the corporate and personal income tax take are too high. The Government states that about 70% of Commonwealth tax revenue is collected from just two taxes; personal and company income tax.
  2. Indirect taxes including the GST form a small and diminishing fraction of the total tax take. In the 1950s indirect taxes made up about 36% of the total tax while today that percentage has fallen to about 23%. Moreover, Australia’s consumption taxes as a percentage of total taxation is lower then the OECD average.
  3. Costs imposed by the tax system are too high and have an impact on economic growth and living standards. The Discussion paper indicates that several taxes in the current system have “high long term costs for living standards” largely as a result of their effects on business investment – these include company income tax, stamp duties and insurance duties.

    Some further points from the Discussion Paper are as follows:

    Rather than critiquing the practice known as negative gearing, which allows Australians to write off against their income tax losses made from rental properties, the Treasury calls into question the tax arrangements that makes it profitable. Since late 1999, capital gains tax has applied to only half of the profit made when each rental property is sold. The paper says it is this arrangement rather than negative gearing itself that is driving investment in rental properties.

    The Treasury says Australia’s company tax rate of 30% is well above those of countries with whom it competes. One third of company tax is paid by just 12 companies. The department says if the rate was cut, half of the benefit would most likely accrue to employees of those companies who would benefit from greater investment, greater productivity and higher wages.

    The paper calls into question the concession known as dividend imputation, which allows Australian shareholders to deduct from their personal tax company tax already paid by the companies that pay them dividends. It says the concession is not available to the foreign investors Australia needs to attract and asks whether it is “continuing to serve Australia well”.

    It says Australia’s taxation arrangements for savings are uneven with saving through bank deposits taxed highly, savings through property taxed at half the rate, savings through Australian shares taxed even less, saving through domestic housing taxed not at all and saving through superannuation tax advantaged. It raises the prospect of one standard rate of tax for all forms of saving, as suggested by the Henry Review.

    The paper effectively rules out taxing the family home or the reintroduction of death duties. It confirms that by international standards Australia is lightly taxed.

    The Treasury has asked for submissions by the end of May. It will produce a draft white paper in the second half of the year and a final white paper by December. Mr Hockey said the paper would feed into the policy preparation process for the 2016 election.

    If you would like to make a submission to The Treasury, Tactica Partners is happy to work with you on this.

    Please Note: Many of the comments in this article are general in nature and anyone intending to apply the information to practical circumstances should seek professional advice to independently verify their interpretation and the information’s applicability to their particular circumstances.

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