Tax

Ensuring Australia’s economic sustainability

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National goals: Improve and clarify our tax policy process, as current tax policy processes create distortions and uncertainty which hinder growth and discourage investment. Adopt a strategic approach to Australia’s tax system to support growth and help resolve our national budgetary challenges.

Australia’s current tax system is unsustainable, but the tax policy process is the first priority for improvement by the incoming Government. Our tax policy process and the resulting uncertainty hinder growth of jobs and Australia’s future.

Tax laws are announced without proper pre-analysis or against private advice. Unsustainable or over-ambitious tax announcements lead to post-announcement delays. As well, announced policies are sometimes cancelled or delayed.

As well the unclear law and policy often allows the Australian Taxation Office (ATO) to take its own novel positions which lead to tax controversy. The tax ‘fog’ of announcements, u-turns and inaction creates uncertainty. It frustrates business capital investment decisions which could create jobs and growth: it diminishes Australia’s reputation.

As a result there are ‘deadweight costs’ and distortions for Australian economic activity.

The big issue: an end to uncertainty in tax policies

Six years after the Australia’s Future Tax System Review (AFTS, “the Henry Review”) was commissioned, and five Assistant Treasurers later, there is no certainty and no clear strategy for our tax system and no clear structure for its processes. Because our tax system is so complex, the uncertainty impacts business confidence and investment and thus affects jobs and economic activity.

Key challenges include the following:

  • Lack of certainty about tax policy and interpretations leads to a lack of trust in the system
  • Tax law changes and over-regulation weaken business confidence
  • Insufficient tax law maintenance leads to ATO taking controversial positions
  • Lack of governance has contributed to process problems

We need a more sustainable and competitive tax system

As well as the major improvement in our tax policy process, Australia must adopt a strategic approach to its tax system, to build community acceptance for a plan for a sustainable tax system built on growth.

  • Australia’s corporate tax environment is not competitive
  • High corporate taxes impede growth
  • It’s not just about tax to GDP ratios
  • State taxation needs reform to fund State responsibilities
  • Expenditure programs cause tax pressures which impede growth1
  • Introducing a more balanced and less volatile indirect tax component in our tax mix

Tax recommendations

The flaws in Australia’s current tax processes and tax structure require action.

  • A disciplined tax policy approach with transparency and integrity

The first tax priority for the incoming Government is a disciplined process for developing tax policies, to achieve certainty and to rebuild confidence for businesses to invest in Australia. Actions include:

  1. Regaining trust by releasing a transparent list of announced measures and their status
  2. Cancelling and deferring various announcements
  3. A structured approach to managing reforms
  4. External oversight is needed
  5. Methodical maintenance of the existing tax law
  • A strategic review of our tax system and its interaction with jobs, growth and investment

A strategic review of Australia’s tax policy directions is needed. The focus should be to encourage economic growth and recover Australia’s position as an attractive investment location, driving jobs growth. This is particularly important outside the resources sector.

The policies need to encourage businesses to invest and link to policies to encourage greater labour efficiency and productivity.

We believe the incoming Government should involve a consultative process to set the environment for the Australian tax system, and to fully expose the risks and challenges head. That can then include an updated consideration of policy directions.

  • Compliance efficiency
    The AFTS review identified, the excessive complexity of our tax system. The frustrations of small business, as well as larger businesses, require a streamlined compliance focus.

    The Review should counter the continuing trend to legislate hugely complex integrity measures which add to the deadweight costs for business and indeed the ATO as administrator.
  • Achieve better tax rules for international businesses in Australia and globally
    As the G20 secretariat for 2014, Australia will have a significant role in the G20 and OECD project to update the tax rules for global businesses in the 21st century. As well as the major tax initiative to combat tax evasion (usually by private persons, using tax havens and secrecy jurisdictions) the project to update the tax rules for multinational businesses is critical.

    This is a major task and Australia needs to follow a disciplined approach. Importantly, Australia must act within the multilateral frameworks so as not to affect our competitive position. Unlike India or China or the USA we do not have huge populations and strong economic attractiveness for new business investment.

    As well the Government must influence global tax policy processes so that countries appropriately allocate their taxing rights and sharing of taxes. Otherwise, multinationals will be burdened with double taxation.
  • Indirect tax and State tax reform
    Working with the States, the Federal Government should consider GST reform and fundamental State tax reforms, to help replace inefficient State taxes and to fund the responsibilities of the states. GST reform should address the base broadening and low rate gaps above.

    State tax reform could also align and standardise the law and practice for existing taxes applying in multiple States. For example, on payroll taxes the States have already moved to align the concepts and approaches, but more can be done. Reform of stamp duties is another priority, to encourage greater economic activity. Currently, varying rules for stamp duty treatment of ‘land–rich companies’ are adding to the cost of doing business in Australia.
  • Encourage workforce participation
    Australia needs appropriate tax incentives to boost participation, including by women and by older Australians. These will both improve productivity and reduce social welfare outlays.

Superannuation

Superannuation

Australia faces significant stress on the public purse, as the cost of supporting our aging population continues to increase. One of our options for reducing this stress is the superannuation system, which was designed to address retirement savings challenges and help take pressure off the Federal budget by reducing outlays on the age pension.

However, with Treasury estimates of the cost of super running at $32 billion per annum, we need to ask serious questions about our current system. What benefits do we anticipate super providing? Does the current system deliver these benefits? Is the cost sustainable over the medium or long-term?

Strategic superannuation reform a must

We need greater certainty around the future direction of Australia’s retirement funding model. The incoming Government must take a strategic approach to superannuation reform, successfully address the nation’s ticking demographic time bomb. Recent changes to super have done little more than tinker around the edges of a system in need of a much more robust and strategic review.

Now we need new strategies that take into account longer life-expectancies, changes to retirement and pension access ages, and the prevalence of small account balances. This is the only way to ensure the existing superannuation system is doing enough to enable more self-funded retirement from those who would otherwise be dependent on the pension.

As compulsory superannuation contribution levels rise, the incoming Government should also consider trimming tax concessions on voluntary contributions, particularly for higher income earners who are already capable of supporting themselves in retirement. It should also look at greater incentives to encourage voluntary contributions for groups who currently have limited opportunities to accumulate super, such as low income earners or carers.

Revise the super guarantee?

The super guarantee should also be revisited, in line with changing work and demographic patterns and the increased cost of living. The system needs to be more equitable for low income earners and those with interrupted work patterns, such as casual workers and women. We may even need an opt-out system for low income earners, on the basis that removing 12% of the pay of such workers may be unduly onerous with little benefit.

When it comes to accessing superannuation funds, the current lump sum payment system is not sustainable. The means testing of the age pension actively encourages retirees to spend their superannuation lump sum, so they qualify for more of the age pension. If superannuation continues to be supported with tax concessions, there should be stronger parameters around lump sum payments to ensure more of the funds are actually used as retirement income to ease pressure on the pension system.

Superannuation access age

The incoming Government should also seriously consider lifting the superannuation access age. When the retirement age was set at 65 (for men) in 1909, the life expectancy (for men) was only 55. Today, Australians can expect to live into their 80s and the figures keep rising. Increasing the access age for superannuation would encourage a longer savings accumulation phase better suited to our longer life spans.

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1Dr Martin Parkinson PSM, Secretary to the Treasury, ‘Challenges And Opportunities For The Australian Economy’, to the John Curtin Institute of Public Policy, 5 October 2012