Achieving tax reform is often a long process as the government of the day looks for consensus before presenting proposals to the Parliament. The process that the current government is following seems to be even longer and more tortuous than most.
It doesn’t help matters when the Treasurer appears to have dismissed a number of suggestions put forward by Treasury just two weeks after the release of the discussion paper.
In his 2013-14 Budget Reply speech incoming prime minister Tony Abbott promised to “consult with the community to produce a comprehensive white paper on tax reform. We’ll finish the job that the Henry review started and this (Labor) government squibbed.”
One would have thought that the 2010 Henry Tax Review - which sought to look forward to the next 40 years - was a comprehensive review of the tax system.
Instead, in the current process Treasury officials have gone back to basics. The long-promised white paper is still to come - the Re:think discussion paper released on 30 March is yet another consultation paper, which sets out a range of questions, but no concrete proposals.
However comments made by Hockey in an interview in the Australian Financial Review this week appears to pre-empt some of the more controversial suggestions in this discussion paper, with AFR columnist Laura Tingle writing that the treasurer “poured cold water” on any significant alteration of dividend imputation, the indexing of income tax thresholds to tackle bracket creep and on changes to the capital gains regime.
Google and ‘Netflix’ taxes
The emerging evidence from last week’s Senate Hearings in the Inquiry into Corporate Tax Avoidance shows the need for reform of international taxation. Although the Re:think discussion paper does raise the problem, there are no suggestions or specific questions in relation to the issues around international tax avoidance - in fact the thrust of the paper is to seek ways to encourage foreign investment.
Re:think asks the question:
Q 34. How can tax avoidance practices such as transfer pricing be addressed without imposing an excessive regulatory burden and discouraging investment?
The treasurer has proposed a “Google tax”, modelled on the UK’s diverted profits tax, which was intended to counteract “contrived arrangements that exploit the permanent establishment rules”. However there are serious concerns as to whether a unilateral approach to the problem will be effective.
The discussion paper raises questions about the GST exemption for imported goods, particularly those ordered on-line. The so-called “Netflix tax” singles out multimedia downloads and is designed to address the situation where video streaming services based in Australia are required to collect GST on videos downloaded here, whereas services based overseas are not required to pay GST as the value is below the import threshold of $1,000. In the virtual world, this is a clear anomaly. The principle behind this move is worthy; but people are already working out how to circumvent the new tax.
Generally, however, broader GST reform will not be proposed unless there is consensus across political parties and the states.
There also seems to be consensus that the taxation of superannuation does need to be reformed. Even the superannuation industry acknowledges that the concessions are skewed to high income earners, and following the repeal of the Low Income Superannuation Contribution (effective from 2017) low income earners effectively pay a higher rate of tax on superannuation than on their take-home pay.
Capital gains tax
But there are other issues raised in the discussion paper, particularly in relation to the taxation of investment income, that the treasurer has discounted before stakeholders have even drafted their submissions.
Q 19. To what extent is the rationale for the CGT discount, and the size of the discount, still appropriate?
The 50% Capital Gains tax discount evolved from the indexation of capital gains that applied when CGT was first introduced.
It is hard to argue that a 50% discount can be justified in the current economic climate, with annual inflation running at less than 3%. Yet this week the Treasurer commented that changing the discount could restrict the flow of capital into start-ups. Although start-up companies are an important area of economic growth, it is only one investment sector.
The Discussion paper also asked:
20. To what extent does the dividend imputation system impact savings decisions?
Dividend imputation, like superannuation and negative gearing, has popular support among the “mum and dad” investors in Australia. But there has been a global move away from dividend imputation systems, leaving Australia and NZ as the two remaining regimes.
The Henry Review recommended that:
Dividend imputation should be retained in the short to medium term, but for the longer term, consideration should be given to alternatives as part of a further consideration of company income tax arrangements.
It has increased investment in Australian companies, whether individually or through superannuation, but it is increasingly anachronistic in the modern economy. However the Treasurer wants submissions to address “how it can be improved” rather than “get rid of it”.
21. Do the CGT and negative gearing influence savings and investment decisions, and if so,how?
Again, the paper highlights the interaction between negative gearing and capital gains tax and suggests a quarantining mechanism to reduce the immediate tax benefit from negative gearing. However, although the Treasurer seemed open to discussions when the paper was released two weeks ago, he told the AFR this week:
We’ve got to be very careful about constantly adjusting the policy. There is a temptation to constantly adjust policy for the volatility of the times. Now, we are in a world where that is incredibly liquid, where yields are incredibly low. That is creating perverse incentives.
But there are ways to construct reform that would not have an adverse impact on other investments.
Although the intergenerational report and the discussion paper highlighted that the main source of revenue growth would come from bracket creep, Hockey has flagged that he does not agree with indexation of thresholds. There is some evidence to support this, as the previous experience of indexation of tax thresholds in the early 1980s contributed to inflation as wage demands increased.
However it is also clear that the government does not intend to see an increase in the personal tax rate; and has already said that the Budget Repair Levy imposed last year on incomes over $180,000 will not be extended beyond the legislated three years. Therefore the formula of the last 30 years, allowing the Government to adjust thresholds periodically, seems set to continue.
So where is the money coming from to reduce the deficit in the current budget? The suggested Bank Deposit Tax is opposed by the banks, who will engage in a campaign like that of the miners in relation to the Minerals Rent Resources Tax. Most of the suggestions from Treasury have been excluded by the Treasurer. The Senate has shown that it will not support further reductions in benefits and services that impact on the least well off. Most government agencies will tell you that they have been squeezed dry.
It is time for an action plan in which all of the options are on the table.