The unpopular 2014 budget was followed by a tax discussion paper in March 2015.
Commentators were quick to point out that the paper is seriously flawed and ignores many important areas. Economics Professor John Quiggan provides a comprehensive analysis, The ‘worthwhile ideas’ in Hockey’s Re:think on tax are straight out of 1975 in the Guardian.
Professor Quiggan (and others) pointed out “……. international comparisons of income tax rates are misleading if they exclude the social security taxes that are levied in most other countries.”
Peter Martin in the Sydney Morning Herald explains:
- Yes, income and company tax do make up a larger proportion of our measured tax take than other OECD nations, but that’s partly because the ‘tax take’ of the others is boosted by including so-called social security contributions.
- These superannuation-like contributions typically account for one quarter and up to 40 per cent of total taxation in the countries that have them.
- We don’t. We have super instead, which isn’t counted in our tax base.
- Comparing like with like (which the Treasury doesn’t do) our tax system probably isn’t that much out of whack with everyone elses.”
PM Malcolm TurnBull has paused the review process and hinted at adjustments to Superannuation but a major change in direction will be needed.
You can help save Medicare and improve our health system by promoting sensible recommendations to improve Australia’s tax system whenever any opportunity arises.
A fairer and more efficient tax system could fund health care improvements. Instead, today’s unfair and inefficient tax system provides an excuse for ideological cuts to health care, education and other nation building services.
What to say?
The Henry Review was non partisan (except that the government of the day specifically excluded GST in the review’s scope).
The Henry Review looks forward to mid century.
The following information may help you develop your own discussion points, it includes some recent topics in the media and extracts from the Henry review where they are available, as well as the ACOSS response which covers various topics:
- Key points from the ACOSS response to Joe Hockey’s tax paper.
- Housing and Removal of the Bias Between Investments
- Multinational Tax Avoidance
- Minerals Resource Rent
- Contact MPs and Senators
ACOSS (Australian Council of Social Service)
“The tax system should be redesigned and strengthened so that people contribute to the cost of services according to their ability to pay.”
- “Australia has a relatively low tax burden compared to other wealthy countries” (p16).
ACOSS comment: Data in the White Paper shows that we are the seventh-lowest taxing country in the OECD.
- On the mix between taxes and income, consumption and property: “Direct forms of taxation – individuals and corporate income taxes, compulsory social security contributions, plus payroll taxes – raise 63% of all taxation in Australia compared to an OECD average of 61%” (p18).
ACOSS comment: That is, our reliance on taxes that ultimately fall on income is close to average.
- On the impact of different taxes on growth:
ACOSS comment: The White Paper confirms our view that consumption taxes like the GST are not much more ‘growth friendly’ than taxes on income. The taxes that have the worst impact on the economy are Stamp Duties levied by the States. See Chart 2.9 (on p25).
- On the progressivity of personal income tax: “Progressive individuals income tax rates and thresholds underpin the overall progressivity of the tax system” (p29).
- Distortions in the tax treatment of different investments probably have an impact on investment decisions: “particularly in Australia’s real estate market, where investment is primarily domestic. If this is the case, any additional savings in housing will amount to additional investment in housing and given housing supply constraints, lead to increased housing prices” (p 59).
- On inequity in the tax treatment of superannuation: “the flat rate of tax on superannuation contributions means that most high income people receive a larger tax concession, relative to their marginal tax rate, than low income people. The same is true during the accumulation phase and even more so during the retirement phase, when there is no tax on earnings” (p 70).
- On private trusts and companies: “As a business grows, it would be increasingly rational for it to adopt the legal structure that would minimise its tax liability. This may involve incorporating, or utilising a trust, but more likely it wold involve a combination of structures. …The tax treatment of different structures means that economically similar activities can be taxed in different ways depending on the legal structure employed by the business…A perception arises that those with additional resources are able to ‘play’ the system” (p 109).
- On a failed experiment with a lower company tax rate for small business ‘start-ups” in the UK: “it introduced disincentives for companies below the threshold to grow. …The Mirrlees Review concluded that this policy was ineffective and costly” (p 119).
- On the impact of GST exemptions: “As a proportion of their income, lower-income households spend more on GST exempt goods and services than higher-income households. This is largely due to higher-income households saving a greater proportion of their income” (p 136).
- More on the impact of GST exemptions: ”While households may spend a similar proportion of their total spending on GST-exempt goods and services in aggregate…lower income households may be more likely to spend comparatively more of their total spending on GST-exempt food, medical products and health services, or residential rent” (p 136).
- On Stamp Duties: “Stamp Duties are some of the most inefficient taxes levied in Australia.” (p 145).
- On Land Tax: “Land Tax as currently implemented in Australia is far from [the ideal model] because of exclusions and because different types of land attract different rates of tax” (p148).
Australia’s superannuation system costs the taxpayer around $32 billion per year, a similar amount to the cost of the age pension.
Of the $16 billion ‘spent’ to subsidise contributions to superannuation funds, about half goes to the top 12% of taxpayers, a significant proportion of whom wouldn’t be entitled to the pension in any event.
Those on the top marginal tax rate, save over 30 cents in tax for every dollar contributed to super by their employer compared to no tax saving at all for those on the lowest wages.
A media release from the Association of Superannuation Funds of Australia (1/4/2015) included:
- (superannuation account balances) ….. with around 70,000 with balances in excess of $2.5 million.
- ….24,000 self-managed superannuation fund (SMSF) members in the pension phase with balances in excess of $2 million received around $5.2 billion in tax-free income stream payments, or an average of around $216,000. “
An old Herald article noted some members of self managed superannuation funds have balances of more than $20 million dollars.
The question that the media has raised many times is:
Should the taxpayer be so generous to high income / high wealth Australians who can ensure they are comfortable in retirement anyway?
The Henry review recommended the following:
- Concessions should be distributed more equitably between low and high-income earners by including employer superannuation contributions in an individual’s income and taxing them at marginal rates.
- A universal uniform concession in the form of a refundable offset could be provided up to a cap (NB suggesting an offset of 15%).
- Voluntary contributions should also be eligible for the offset subject to the cap.
- The tax on superannuation contributions within the fund should be abolished.
- This arrangement would provide a consistent concession to all contributions irrespective of a person’s income
- All income and gains of superannuation funds should be taxed at a rate of 7.5 per cent, further increasing savings. (NB current pre pension phase tax is 15% or 0% depending on the source of funds and during the pension phase the tax is 0% for funds from all sources ).
- Superannuation balances should be included in Age Pension means tests on the same basis as other savings.
Housing and Removal of the Bias Between Investments
At the moment high income Australians can invest in real estate and deduct interest costs from their salary to lower marginal tax rates, then in the future receive a 50% discount on capital gains.
Lower income Australians are priced out of owning a home and pay the full marginal tax rate on the interest on their savings.
Inflation improves capital gains for high income people and erodes the value of the savings of lower income Australians.
The Henry report recommended:
- a more neutral personal income tax treatment of private residential rental investment should be introduced, with less volatile market effects, through a 40 per cent discount on all net residential rental income and losses, and capital gains.
- A move to a broad 40 per cent discount for income from bank deposits, bonds, rental properties, and capital gains and for certain interest expenses ……. providing more consistent tax outcomes.
- Maximum rates of Rent Assistance for income support recipients should be substantially increased and linked to movements in market rents.
Multinational and Large Company tax avoidance
The use of tax havens, international tax treaties and other strategies has exploded denying Australian governments a significant amount of revenue.
Michael West, SMH, used freedom of information laws to investigate multinational tax avoidance and concluded that “Australia’s corporate tax base is in crisis because of the explosion in tax haven dealings by multinational companies”
“The Tax Office document “Corporate Transparency Overview” showed that between 2005 and 2011 there was a 49 per cent rise in the number of controlled entities in havens and low-tax jurisdictions by companies in the ASX Top 100.”
“……… for foreign-based multinationals: 34 per cent paid zero tax in 2010 and 30 per cent paid zero in 2012. What doesn’t show up in the FOIs is that, thanks to aggressive profit shifting into tax havens, many pay some tax but very little.”
The Tax Justice Network states that “In 2013, 57% of ASX 200 companies disclosed subsidiaries in secrecy jurisdictions (tax havens) – but this could be much higher as reporting is not mandatory”
A specific example of an accounting structure is described by Michael West in the Sydney Morning Herald, Rupert Murdoch’s US empire siphons $4.5b from Australian business virtually tax-free.
- “News has justified its practice of “repatriating” cash – $1.3 billion only last year – by making a “return of capital” to its New York parent.”
- “In order for this capital to be returned, it had to be created in the first place. This was done via a transaction in late 2004 whereby News interposed a $2 company at the top of its web of Australian companies. … then issued 77 billion shares to News Corporation in New York, ..”
- “……..share capital ballooned by $7 billion for a temporary adjustment to intangible assets that has the character of internally generated goodwill……”.
- “News Corp ceased producing “general purpose” financial reports in 2006″
To make matters worse:
- Joe Hockey’s has been quoted saying he wouldn’t make changes until other countries did. The Treasurer’s recent commitment to copy a new UK tax generated media comment that it would breach some of Australia’s tax treaties and hence be of questionable effect.
- The USA has been reported to be delaying any action by the G20 because the USA benefits from multinational tax avoidance in other countries and doesn’t want to erode its tax base.
- Australia has signed a web of trade agreements and tax treaties over the years that facilitate multinational tax avoidance and hinder the Australian Government and Tax Office’s pursuit of avoided tax.
- Tax treaties were developed for a world of bricks and mortar commerce and now we have a world including internet clouds. A good example of the effect in a tax treaty: Google competes with Australian companies for advertising but Google invoices Australian customers direct from Singapore where tax rates are 17% and potential tax holidays etc can take rates down to 1%. Google’s actions are sanctioned by a tax treaty with Singapore because they have no “bricks and mortar” office in Australia.
- Legal academics have savaged the wording in Joe Hockey’s proposed multinational tax legislation suggesting it will be ineffective. Ultimately Joe Hockey didn’t present the proposed tax legislation and is now no longer Treasurer
- On 21st August 2015 the Shadow Treasurer wrote in the Guardian “The parliamentary week has ended with the Abbott government introducing a bill to help some of Australia’s biggest companies keep their tax dealings secret.” Full article at external link http://www.theguardian.com/commentisfree/2015/aug/21/joe-hockeys-tax-disclosure-wind-back-is-a-reform-nobody-asked-for
The Henry Review provides some advice:
- Thin capitalisation and transfer pricing rules should continue to be used as mechanisms to ensure that what is judged to be the appropriate level of tax is collected from investments in Australia
- There are other complex points but also the disclaimer “so long as there are appropriate safeguards to limit tax avoidance” and clearly Australia does not have those safeguards in place.
In the absence of any significant leadership from the Australian government, possible solutions seem to include:
- tightening thin capitalisation and transfer pricing criteria.
- providing stronger laws for the tax office to work with.
- updating tax/trade treaties and enacting legislation where other countries delay resolution.
- mandating full corporate reporting to the ATO by all companies deriving revenue from Australia.
- requiring the ATO to provide full disclosure to Federal parliament so that legislation can be promptly and effectively modified.
- make more extensive use of the ATO’s new powers of reconstruction – which allow it to reprice, restructure or disregard a cross-border transaction. Strengthen reconstruction legislation where legal challenges find weakness.
- abolish deductions under section 25-90 of the Income Tax Assessment Act 1997 which allows global corporations to load up subsidiaries with debt and then claim relief from Australian tax. The abolition has already been announced by the Gillard government but not yet implemented.
- As suggested by SMH Michael West, require multinationals’ Australian subsidiaries (inc their off shore subsidiaries) to comply with the same general reporting standards imposed on Australian companies, rather than the secretive “special” reporting multinationals currently choose to supply. Also to make the reporting easily available at no cost as Australian companies do rather than imposing fees and obstacles as multinationals do.
Minerals Resource Rent
The Gillard government’s resource rent has been consigned to history.
Opposed by a Coalition of the Liberal party and the Mining Industry with a luxurious media budget, its implementation was severely compromised. The tax was promptly cancelled by the new Abbott government while the generous “up front” tax deductions for mining companies still suppressed revenue.
The Henry Review recommendations (Dec 2009) are still informative and still claim improved efficiency despite current lower minerals prices.
The current resource charging arrangements should be replaced with a uniform resource rent tax administered by the Australian government. Such a tax would provide a more consistent treatment of resource projects and promote more efficient investment and production outcomes. It would also ensure that the Australian community receives an appropriate return on its non-renewable resources.
The current charging arrangements distort investment and production decisions, thereby lowering the community’s return from its resources. Further, they fail to collect a sufficient return for the community because they are unresponsive to changes in profits, particularly output-based royalties. For example, existing resource taxes and royalties have collected a declining share of the return to resources over the recent period of increasing profitability in the resource sector.
(In 2013/2014 mining and energy sectors donated $1.8 million to he Liberal and National parties out of total $2.3 million in donations, SMH 6/4/2015)
The government keeps mentioning increases to the GST and clearly would like to increase the GST.
Unfortunately the scope for the Henry review did not allow consideration of the GST.
Amongst wealthy OECD countries, Australia and the USA provide lower welfare payments and I would think, Australia should reasonably have lower GST/VAT rates which fall more heavily on low income citizens.
Child care costs in Sweden provide an interesting example of higher welfare compensation to low income citizens and higher VAT (GST) rates than Australia.
In Australia child care costs are very high, even after government subsidies and the nation loses productivity because many mothers cannot afford to work a full week.
Australia’s GST rate is 10%.
In Sweden “You pay 3% of your gross salary but there’s a cap so you never have to pay more than 1,260 Swedish krona [currently A$188] a month per child – and if you have more children, you’ll pay a maximum of 420 krona [A$63] for the third child and nothing for the fourth,” (Donna Ferguson, The Guardian)
In Sweden, VAT is split into three levels: 25% for most goods and services, 12% for foods including restaurants bills and hotel stays and 6% for printed matter, cultural services, and transport of private persons. Some services are not taxable for example education of children and adults if public utility, and health and dental care, but education is taxable at 25% in case of courses for adults at a private school (Wikipedia).
However, economists and journalists at times do suggest that the GST should be expanded to include private health and private education which would raise $2.3 billion per year (NATSEM modelling) and be paid by predominantly middle and high income households. It appears that Sweden has already adopted this strategy applying 25% VAT to private education.
Submit your tax recommendations direct to MPs and Senators
1. To help steer the government back to a broader scope to genuinely improve our tax system, you can write to MPs and Senators of your choice.
This link allows a search by postcode, contact options vary for different MPs and Senators.
Always ask for a reply.
3. Email the link for this page to friends who might be interested in promoting a fairer and more efficient tax system that could fund health care improvements.