The Budget: What does it have to do with tax reform?
This year’s budget claims to “progress the government’s tax reform agenda, improving fairness and integrity in the tax system”. Does it? The short answer is no.
The budget contains no sweeping tax-rate changes, no major tax-transfer reforms, no abolition of fringe-benefits tax or work-related deductions or abolition of negative gearing. Some of you may be breathing a sigh of relief at this point.
Indeed, it’s not clear what the government’s tax reform agenda actually is.
But it promises to “work methodically” through the Henry Tax Review before the Tax Forum in October when the “broader Australian community” will have our say on tax reform.
In the meantime, here are a few of the more interesting tax measures – and omissions – in Treasurer Wayne Swan’s fourth budget.
Closing a few tax loopholes
The government has seized the opportunity to close a few loopholes and poorly-designed tax concessions, implementing a few Henry Tax Review recommendations.
One “fix”, which will enhance fairness, ends the ability of higher income families to pass $3,000 each year, free of income tax, to each child under the age of 18.
In 1981, John Howard as Treasurer introduced rules to tax discretionary trust distributions and investment income of minor children at the top marginal rate.
This ended the opportunity for wealthy families to reduce tax by splitting income with their children. But in the last decade, significant increases in the low-income tax offset, which children can access, have made this avenue increasingly attractive.
The government estimates that this will raise $740 million over the next three years.
Another welcome measure is the phasing out of the current car fringe benefit tax concessions for salary-sacrificed or employer-provided vehicles that are driven further, replacing them with a single flat rate of 20% of costs (regardless of the distance travelled).
This is one of the few “wins” for the environment in this budget and it’s expected to save nearly $1billion over the next three years.
The government will also abolish the entrepreneur’s tax offset. This complex and poorly targeted tax concession was introduced as a sop to the small business sector by the Howard government. The abolition is estimated to save $365million.
These two changes both improve the tax system, even if they have been replaced with a blatantly political, but fortunately temporary, $5,000 tax rebate for new vehicles – dubbed in some quarters by as “ute” concession for small business. The Greens have said they will push for this to be linked to energy-efficient vehicles.
University students will mourn the end of their short-lived ability to deduct education expenses against youth allowance, as the government legislates to overturn the Anstis decision, won by student Symone and her dad before the High Court last year.
Current students get a windfall, as the restriction commences next year.
This closes a potential hole in revenues, while the immediate reduction in the upfront discount for HECS fees from 20% to 10% will raise revenue and hit some students – but only those who could afford to pay fees upfront in the first place.
What’s in it for women?
Minister for the Status of Women, Kate Ellis, will present a Women’s Budget Statement on Thursday, May 12 at Parliament House. Overall, women seem likely to lose in the budget’s tax and welfare measures.
One reform, long overdue, will improve equity and may support the government’s workforce participation goal for women.
This is the phase-out of the tax offset for dependent spouses currently aged 40 or under from July 1, 2011. The offset of as much as $2,000 a year is an anachronism.
It is paid to a primary breadwinner by reducing his tax (yes, it’s usually a “him”), if the spouse earns less than $10,000 a year.
Dependent spouses with children are not affected because they are eligible for Family Tax Benefit B instead; nor are those who are carers, invalid or permanently unable to work.
The budget estimates a saving of $220 million a year (the offset costs a total of $500 million a year, according to the 2010 Tax Expenditures Statement).
It would be unfair to remove the offset altogether for older dependent spouses – but why not convert it to a benefit paid directly to the dependent spouse herself?
Women caring for children also bear many of the welfare cuts in the budget.
They are negatively affected by the freezing of income thresholds and other restrictions on Family Tax Benefit A, although lowering the child’s age from 24 to 21 seems appropriate. And it’s partly compensated by increasing the value of the benefit for teenagers.
This is expected to save more than $2billion in the next three years.
The Henry Tax Review acknowledged the disincentives in the tax-transfer system faced by mothers seeking to return to work.
Economist Patricia Apps of Sydney University shows that mothers working part-time or full-time on average or below average wages face high marginal tax rates and lose close to 30% of wages in withdrawal of family benefits and income tax. This is a heavier tax burden than for most high-income earners.
This budget does not reduce tax rates on mothers in the workforce, with two small exceptions. The decision to bring forward the low-income tax offset, estimated to cost $1.3billion this year, will help a bit. It covers six weeks of public transport commuting costs in Melbourne.
Low income sole parents, mostly women, will face a lower effective tax rate, as a result of a change in benefit structure. This reform is part of a welfare-to-work package that puts sole parents under increased obligations for meetings with bureaucrats and job searches.
Let’s hope that the Family Assistance Office will provide genuine support, not just more surveillance, to improve the prospects of young single mums.
Of course, women will benefit from the Gillard government’s crucial paid parental leave scheme, which started in January and provides 18 weeks of support at $570 per week. But paid paternity leave for fathers has been deferred to 2013, saving the government $33 million over five years.
More seriously, women will suffer from recent government “savings” in targeting childcare benefit, effective from March. Childcare benefit now phases out at joint family income of $134,443 for a family with one child. This means that a couple earning two average full-time wages receives negligible childcare benefit.
This income test will disadvantage, and may discourage, many women from returning to work while paying for childcare.
A new regime for charities
Following consultations, the government has committed to provide $53.6million to establish a new Australian Charities and Not for Profits Commission. The decision to establish an independent federal regulator is a good one. But the government has gone further in announcing other tax measures for charities.
As reported last week, it proposes to tax profits of charities derived from unrelated commercial activities. A regime to do this exists in the US (where it generates complexity and significant tax planning) and there are some restrictions on commercial activity of charities in the UK.
It’s not clear what the scope of the reform will be. Assistant Treasurer Bill Shorten describes it as encouraging charities “to direct profits generated by unrelated commercial activities back to their charity’s altruistic purposes”, or tax is due on the profits. But this is already the law, as made clear by recent High Court authority.
The bigger sting in this proposal is that charities will not be able to use GST and Fringe Benefits Tax concessions for their unrelated commercial activities. Sausage sizzles, and businesses related to the charitable purpose (including-not for-profit hospitals, “op shops” and social enterprises providing employment for disabled persons), are not affected.
The government has also announced it will enact a legislative definition of charity. Currently, the tax law relies on early English categories of charitable purpose which define it as the relief of poverty, the furtherance of religion, education and other purposes of “public benefit”.
A previous attempt to legislate a definition by the Howard government failed, primarily because of concerns that the government sought to restrict advocacy and law reform activity by charities in its proposed definition.
It’s not clear what this government’s view is on political advocacy by charities or, as it proposes to consult with States and Territories, when this measure will be enacted.
And what about the budget process itself?
It was part of the government’s political commitment to the Greens and Independents that it would examine the proposal for a Parliamentary Budget Office. Following a recent Senate report, the government has allocated $24 million to establish this office.
This follows the innovation of the New South Wales Parliament, which established a Parliamentary Budget Officer in 2010.
The primary role of a budget officer will be to cost policy proposals and provide advice on economic and fiscal matters to parliamentarians. Similar offices exist in Canada and the United States. The US Congressional Budget Office is influential, credible and well-resourced.
Our Parliamentary system is quite different, though closer in style to that of Canada. It may be that all we need to improve budgetary decisions is a more independent, better-resourced and braver federal bureaucracy.
But it’s worth trying a measure that could improve the capacity of parliamentarians to engage in the budget process. It remains to be seen what contribution the budget office will make to enhancing the quality and transparency of the budget.