Tax Discussion Paper - A Reader's Guide

The Tax Discussion Paper - A Reader's Guide (120 kb)

On March 30, the Government released Re:think, Treasury’s Discussion Paper on the reform of Australia’s tax system, carrying the tagline, ‘Better tax system, better Australia.’ It is the first formal step in a process which will lead to an Options Paper later this year and a final White Paper prior to the election next year. The document is deliberately long on description and short on prescription. This Tax Brief examines what the document says and analyses some of the areas which the Discussion Paper has singled out for detailed attention.

Some general observations on the Discussion Paper

In May 2013, in his Budget Reply speech, then Opposition Leader Tony Abbott promised that a Coalition government would produce a ‘comprehensive white paper on tax reform.’ The Discussion Paper just released is the first step leading to that document. A ‘White Paper’ is the term used in government circles to mean a statement of the government’s intended policy and actions, so this process is meant to culminate in a statement that will declare the Coalition Parties’ tax policies if they win the 2016 election. That circumstance will influence the entire project. While Ken Henry was constrained by explicit terms of reference not to examine the GST, this process will be subject to an implicit political constraint: to consult, to engage, to include, but above all, not to alarm.

Hence, at this early stage, the Government seems very keen to stress its openness to new ideas (‘the Government will be considering every worthwhile idea, even if it does not fit neatly with the existing set of major taxes we now have’) and to have everyone engaged (‘the Government is keen to hear from all interested parties on any issues regarding the tax system’).

In order to do this, the Government needs to galvanise enthusiasm with messages like the urgency of the current situation (‘the world economy has been dramatically transformed in recent decades … [and] the tax system needs to adapt to these challenges’), the limited opportunity for changes (‘the Government’s review of roles and responsibilities across the Federation provides a once-in-a-generation opportunity to examine the whole of the tax system’), the primacy of tax policy settings in determining our long-term well-being (‘some argue that comprehensive tax reform could promote economic growth more than any other area of government policy’) and why this project is going to be different to the last tax reform project, or the one before that, or the one before that, etc (it will ‘deliver lasting, workable reforms’).

So, Treasury has produced a document that is long on description and short on prescription. There are few explicit statements in the document that are presented as definitive recommendations. Instead, one has to speculate just where any particular observation is meant to lead. It tries to be comprehensive, but non-committal. In short, it is an excellent example of a Discussion Paper.

A blank canvas? But that is not to say, there really is a blank canvas. First, at several places, the Discussion Paper already makes clear that some topics are a ‘no go’ area. For example, there will not be any changes to the treatment of the family home (‘given the central importance of the home for Australian families, there is a strong consensus that it would not be appropriate to tax either the imputed rent on owner-occupied housing or capital gains derived from it’). A financial transactions tax along the lines of the currently dormant European proposal is similarly discounted (‘taxes on FTTs add to the costs of buying and selling financial products and, as a result, can distort decisions about mutually beneficial transactions’). And the bar for changing the GST is set so high, it is in effect off the agenda too (‘the Australian Government will not support changes to the GST without a broad political consensus for change, including agreement by all state and territory governments’). It is best to reassure the electorate and industry at the outset.

Secondly, the Paper reports that some decisions have been made apart from the White Paper process and are going ahead regardless:

  • a review of TOFA and consolidation: ‘Australia has developed complex rules for the taxation of consolidated groups and for the taxation of certain financial arrangements … The simplification of these regimes requires detailed consideration [which] is being undertaken through separate review processes’;
  • new CIV regime: ‘the Government considers that there is a case for extending the range of collective investment vehicles that can be offered by Australian funds managers [and] … Treasury will consult with industry stakeholders in coming months with a view to developing proposals for inclusion in the Options Paper;’
  • (another) review of R&D:‘the Government intends to review the operation of the R&D tax incentive through the Tax White Paper, within the broader context of reviewing the effectiveness of existing tax incentives for innovation, industry-funded research and collaboration with public research institutions.’

And the Treasurer has recently hinted in public speeches that next month’s Budget will contain a package of small business measures.

On two of the current hot topics, negative gearing and superannuation, while the Government says it is open to new ideas, the Paper has all but nailed its policy colours to the mast already:

  • negative gearing:‘negative gearing does not, in itself, cause a tax distortion …’; ‘it allows more people to enter the market than those who might have had the equity alone to do so …’; ‘negative gearing is not a specific tax concession for taxpayers with investment properties’; ‘the majority of tax filers with negatively geared properties fall into the middle income bands [which] reflects the distribution of taxpayers across taxable income bands …’; ‘allowing investors to claim deductions for interest expenses ensures consistent tax treatment between debt and equity financing …
  • superannuation: ‘superannuation is designed to improve individuals’ retirement incomes. In doing so, it also reduces pressure on Age Pension expenditures’; ‘the policy merit of … tax concessionality has to be judged taking into account Australia’s full retirement income support arrangements, including the means-tested Age Pension’.

The message is clear: you will have to persuade us to abandon these positions.

A couple of new topics appear in the Paper that have not been prominent in the public debate in recent times. One curious appearance is the brief discussion about whether it would be possible to eliminate the capital v. income dichotomy in Australian tax law. This is a clear invitation to suggest ways to achieve this outcome. Another is a long theoretical discussion about developing a metric for measuring tax complexity.

Unlike the 2010 Henry Report and its UK twin the Mirrlees Report, the Discussion Paper pays little attention to the ‘cutting edge’ of tax policy debates or a discussion of the modern theory of ‘optimal taxation.’ Henry introduced the Australian tax community to ideas like a cash flow corporate tax, an allowance for corporate equity and rent-based taxation models. While there is some discussion of the modern economics literature, the general approach is more sceptical and selective, though a few conclusions asserted in the Paper are based on modern views of the tax world, eg, the conclusion that, ‘in the long run, over half of the economic burden of corporate tax is likely to be shifted away from shareholders through lower wages for employees and higher prices for consumers.

It is probably inevitable in a process such as this, that the agenda is implicitly already set in some respects by the authors’ decisions about which topics to include and exclude from the Paper: entity taxation is more or less ignored, and there is a very narrow discussion of Australia’s international tax rules, for example. Just as important is what the Paper chooses to say about certain topics: dividend imputation is problematic because it ‘makes little contribution to attracting foreign investment to Australia’; there is no discussion about changing the tax treatment of income flowing through trusts, although there is a less than enthusiastic discussion about creating a small business regime modelled on the US S-Corporation; transfer pricing rules have to be designed and administered with an eye to avoiding ‘an excessive regulatory burden and discouraging investment’.

Dodging the underlying tensions. The Discussion Paper also studiously avoids any attempt at reconciling the tensions between some of the prominent stakeholders in this process. Everyone has welcomed the project, but everyone is hoping for different outcomes:

  • It is clear from earlier statements by the Prime Minister and the Treasurer that the Government’s goal for this project is that it leads to lower (and simpler and fairer) taxes, a statement which is reaffirmed in the Foreword to the Discussion Paper (‘taxes that are lower, simpler, fairer’) and on numerous occasions thereafter.
  • Some civil society groups have been actively campaigning for increased taxes in total and for individual measures that would redistribute the tax burden (ACOSS has said, ‘tax reform is the key to resolving our long term public Budget problems. The tax system should be redesigned and strengthened’).
  • Treasury’s own preference is to focus on how tax is raised, an emphasis which the Discussion Paper maintains (‘tax reform offers an opportunity to significantly improve productivity and foster jobs, growth and opportunities’).

The Options Paper and the White Paper will have to negotiate the obvious conflicts between those expectations.

And the Government will face the obvious task of trying to reconcile its desire for ‘taxes that are lower, simpler, fairer’ with three other messages that challenge the argument for reducing taxes:

  • the proposition in the Discussion Paper that ‘Australia’s [current] overall tax burden is [already] relatively low compared to other developed countries,’
  • the analysis in the December 2014 MYEFO of, ‘the $43.7 billion deterioration in the budget over the forward estimates’ and the persistent message to the press of the need to ‘repair the Budget,’ and
  • the argument in the March 2015 Intergenerational Report that ever-increasing societal demands for government spending, the health care costs of an ageing population and the diminishing proportion of the population engaged in the taxpaying workforce mean, under current policy settings, ‘an unequivocal deterioration in fiscal sustainability.’

Multiple reviews and inquiries. The current Government, as it promised in opposition, has set up a veritable plethora of reviews and enquiries. The Discussion Paper states that the Government is keen to hear from all interested parties on any issues regarding the tax system, including views on tax matters raised in other Government initiatives and review processes, such as the Government’s broad-ranging deregulation agenda, the Murray Financial System Inquiry, Productivity Commission inquiries, the Competition Policy Review and the White Papers on Federation, Agricultural Competitiveness and Northern Australia.

Complexity and compliance costs. The Paper notes that while it is broadly agreed Australia’s tax system is complex, there is no single measure of complexity. Administration and compliance cost estimates are often used as a proxy. The costs of administering the tax system at the Commonwealth level (including the GST) were around $3.6 billion in 2013-14. The ATO has estimated that total tax compliance costs in Australia are in the order of a rather remarkable $40 billion per year.

In summary, given that tax reform is almost always about the winners and losers from any changes to the status quo, and given the shadow of political constraint, the likelihood of fundamental changes from this process seems low. Instead, a list of specific proposals will emerge in the next 18 months drawn from the topics put forward by Treasury. At this stage, given the somewhat precarious political situation in which the current Government finds itself, with little political capital available for heroic but potentially unpopular reforms, it is not clear whether that list will substantially affect the total level of tax collected by Australian governments, the constellation of taxes used, or the relative burdens borne by disparate groups within (and outside) the country.

Business tax proposals

The taxation of business profits earned through large, widely-held entities is discussed in a single chapter (ch 5) of about 30 pages. It is mostly focussed on the treatment of companies. Trusts are mentioned briefly; stapled groups are ignored.

Treasury now seems even more firmly of the view that the corporate tax is very damaging to the Australian economy:

Treasury research estimates that each additional $1 collected by way of company income tax reduces the living standards of Australian households by around 50 cents in the long run because of reduced investment. This impedes Australia’s productivity and, in turn, reduces opportunities for better paying jobs.

Interestingly, only stamp duties on real estate transfers are considered to have a higher long term cost to Australian living standards than company tax.

The Paper also emphasises other countries are both reducing their headline corporate rates and the share of revenue they collect by the corporate tax, which leads to a long discussion of the pros and cons of reducing Australia’s rate to ensure Australia remains attractive to foreign investors (and with spin-off benefits like reducing the attractiveness of tax avoidance). The clear impression is that Treasury will repeat the recommendation made in the Henry report that the corporate rate needs to be reduced.

The discussion on other business tax issues is not comprehensive and, with a couple of exceptions, is not especially detailed, nor does it raise many new issues. Rather, a number of Treasury’s ongoing preoccupations re-appear (for example, imputation), and some of the old chestnuts in business taxation are revisited (for example, the asymmetric treatment of losses, the appropriate treatment of non-wasting intangibles, the use of incentives to encourage innovation, greater reliance on financial accounting). But some new issues are probed (removing the capital / income dichotomy, trying to equalise the tax outcomes for investments financed by debt v. equity v. retained profits, and new collective investment vehicles aimed at attracting foreign portfolio investment).

The imputation system

Treasury’s implicit message seems to be that, at least in retrospect, dividend imputation (one of Paul Keating’s proudest achievements as Treasurer) was probably a mistake. There is nothing new in this position. The Paper quotes, and all but endorses, the conclusion reached in the Henry report that ‘the benefits of dividend imputation have declined …

The Paper notes imputation is out of line with current practices in other countries, it biases the savings decisions of resident households toward domestic equities, reduces the value of some tax incentives, adds to the complexity of the entire tax system and has little effect as a mechanism for attracting foreign investment. There is seemingly grudging acceptance that imputation ‘has integrity benefits.

There is no discussion in the Paper as to exactly how any transition out of the current imputation system would be achieved, and what would happen to the current (very valuable) stock of franking credits held by Australian companies. There is also no discussion as to the impact of the current imputation system on the cost of capital of Australian companies, nor the role that franking credits play in their market valuations.

The domestic tax base

1. The discussion of depreciation rates raises just two issues: continuing accelerated depreciation because of statutory caps for some assets, and the divergence between effective lives for tax and accounting purposes.

There is also a very brief discussion of the tax treatment of intangible assets – the cost of self-generated intangibles will typically be immediately deducted, while the cost of some purchased intangibles may be recovered only when and if they are later sold. The Paper simply asks, can this be improved?

1. The discussion of losses focuses on two issues: the asymmetry between taxing gains immediately but deferring the use (and thus reducing the value) of losses, and the inability to carry back losses to secure a refund of tax paid in prior years. Treasury’s concern is that, ‘the tax treatment of losses [may] discourage risk-taking and innovation and hinder businesses restructuring.

Corporate finance. The Paper revisits the incentives to finance corporate activities with debt, equity, retained earnings and hybrids, and argues ‘different tax treatment of these financing arrangements leads to complexities in the tax system and creates incentives for tax planning.’ But beyond that observation, the Paper is silent. It simply poses the ultimate question, ‘should the tax system provide a more neutral treatment of different financing arrangements … and if so, how.’ Given just how deeply these distinctions are embedded in the architecture of the international tax system, this part of the Paper may not make it to the Options Paper.

Revenue / capital distinction. One of the few surprises in the Discussion Paper is the brief discussion of the capital / income dichotomy. The Paper re-states the obvious: the proper classification of receipts and outlays is often unclear, but can be highly significant, especially for non-resident investors. But having raised the tantalising possibility of eliminating the distinction, thePaper does not have much to say about how it might be done. In a realisation-based CGT, one might doubt whether Treasury would actually be willing to allow the immediate use of (currently quarantined) capital losses to reduce tax on ordinary income. Certainly, there is no discussion of the possible transitional treatment of the existing (and significant) stock of capital losses.

TOFA and consolidation. The Paper accepts that, while TOFA and consolidation, ‘were designed, in part, to reduce compliance costs for businesses,’ the actual result was, ‘a very large and complex set of legislation, rulings and ATO guidance material which create their own uncertainties and complexities.’ The Paper notes that Treasury currently has a project on foot trying to improve TOFA and will set up a review of consolidation later this year. Beyond that, the Paper offers no comment.

Industry-specific measures. The Paper raises the question: Australia currently has special rules for some industries (agriculture, small business, life insurance); do we need special rules for other industries as well?

Greater reliance on financial accounting. The Paper asks whether there is scope for even greater reliance on financial accounting information in calculating tax liabilities: ‘for more than a decade, policy consideration has been given to greater alignment of the calculation of ‘profit’ between tax and accounting systems… The convergence of accounting and tax calculations of profit would potentially reduce complexity and compliance costs.

Entrepreneurship and innovation. The Paper dedicates one section to tax measures directed to encouraging entrepreneurship and innovation. It notes two measures that exist already: the R&D tax incentive and the (recently amended) rules for employee share and option plans offered by eligible start-ups:

  • clearly the merits of the R&D incentive are to be revisited. Australia currently loses $2.5bn per annum in tax foregone and the Government is sceptical. Consequently, the Paper notes, ‘the Government intends to review the operation of the R&D tax incentive through the Tax White Paper,’
  • as to the regime for share and option plans offered by start-ups, the Paper simply notes this is a work in progress.

The question posed in the Paper is whether there are other things the Government should be doing in the tax system to encourage entrepreneurship and innovation.

International issues

Out of almost 200 pages, the Paper allocates only about 5 to the rules for taxing the income from cross-border transactions. The discussion of this topic is probably more truncated than any other.

It is not as though there is a shortage of things to talk about: large parts of the Board of Taxation’s reviews of Australia’s international tax rules (such as the treatment of dual resident companies and the reform of our CFC rules) have not been pursued, the OECD G-20 BEPS project is challenging some fundamental building blocks of the international tax architecture, the UK has decided to ‘go it alone’ on the PE threshold with their Google tax (perhaps with Australia to follow suit in the May Budget), other countries are talking about enacting their own idiosyncratic measures, Europe has amended the Parent-Subsidiary Directive to address a major class of hybrid financial instrument and we have probably not seen the end of the debate over s. 25-90 and possible anti debt-dumping measures. Instead, the Paper raises just a handful of issues, some of them quite odd, and deals with them in a desultory manner.

Inbound investment. With regard to inbound investment, the Paper suggests one issue for readers to consider: a new form of CIV designed with highly mobile foreign capital in mind:

The Government considers that there is a case for extending the range of collective investment vehicles that can be offered by Australian funds managers… A broader range of collective investment vehicles will assist the export of financial services, by allowing Australian funds managers to offer products that are familiar to overseas investors… The Treasury will consult with industry stakeholders in coming months with a view to developing proposals for inclusion in the Options Paper.

This is not a new idea; the commitment to include it in the Options Paper is.  The Board of Taxation’s report on the issue was delivered to the previous government in 2011 but remains unpublished.

Outbound operations. With regard to outbound investment, the Paper has nothing to say – beyond noting that income from outbound investments is taxed differently in the different countries in which it is earned, and receives different treatment if repatriated to Australia, two propositions which are self-evident and unremarkable.

Transfer pricing. The half-page section on transfer pricing is perhaps the most odd. After noting that we have transfer pricing rules, the question put to readers for their consideration is, how should Australia administer those rules so as not to discourage foreign investment? This is a curious question if it is meant to elicit suggestions for reforming the world of transfer pricing. There is a lot to say about transfer pricing; its impact on foreign investment is one of the more obscure perspectives.

Personal income tax

Two chapters in the Paper are devoted to the personal income tax, one focussing on the taxation of individuals generally, including fringe benefits (ch 3) and a second on the taxation of savings (ch 4). In addition, the chapter on small business (ch 6) largely presents small business taxation as involving questions of personal income tax (‘small businesses are often family businesses and a person can be simultaneously owner, manager, employer and employee’).

Wages and fringe benefits

The emphasis in the chapter on taxing individuals is directed mainly to two issues:

  • wage inflation means more of the population are unintentionally sliding into higher marginal tax rates (‘bracket creep’) and high marginal tax rates on labour income can discourage workforce participation for some groups in society (women, older workers, low-income taxpayers) reducing overall economic productivity, and
  • high marginal tax rates increase the demand for tax planning reducing the progressivity of the system and the dead-weight cost of the income tax.

In addition, there is a longish list of other issues singled out for attention:

  • the FBT is expensive to operate and produces little revenue but is important to maintaining integrity,
  • there are too many definitions of ‘income’ used in various parts of the tax system – eg, determining what is assessable v. clawing back concessions v. access to government benefits,
  • high tax rates may contribute to a ‘brain drain’ though if people eventually return to Australia, their temporary departure to acquire new skills and knowledge may actually be beneficial,
  • it is not clear that low tax rates on employment termination payments serve any useful purpose with the growth of universal superannuation, and
  • work-related deductions are problematic for several reasons, but changing the current rules (eg, reviving the standard $500 deduction proposal) will be hard.

Nevertheless, the conclusion reached by the authors is that this part of the tax system is probably working well:

income tax is usually considered to have a comparatively moderate impact on the behaviour of most people, and relatively minor adverse impacts on economic growth and living standards. However the impact on workforce participation should not be ignored, particularly in the context of an ageing population

Yet at other points, the Discussion Paper comments that Australia’s relative shares of different types of taxes, including taxes on employment income, are quite different from OECD averages and regional averages, and that this disparity is something which should be addressed. It is not clear why it is so important that Australia is out of line – every country is out of line with the average – and in any event the averages themselves are likely misleading as they seem to continue the OECD practice of providing unweighted averages.

Savings

With regard to taxing savings, the main message is about the way the tax system distinguishes between savings made and held in different forms – the family home v. a bank deposit v. investment properties v. superannuation etc. The assumption is that these divergent outcomes probably distort the form in which savings are held, but maybe not the total level of household savings.

Two causes of distortion are noted for special mention:

  • the 50% CGT, which ‘discourages saving in instruments such as bank deposits, and supports saving in capital assets such as equities or property,’ and
  • the dividend imputation system, which ‘has the effect of increasing the return for Australian shareholders in Australian equities [and imposing] an extra layer of tax on savings in foreign equities.’

The superannuation system and negative gearing are also singled out, but may end up being left largely intact, as discussed above.

The Paper does acknowledge the high profile debate in the economics literature about whether it is appropriate to tax income from savings at all, but dismisses the argument (‘empirical evidence suggests the behavioural response to taxing savings is uncertain and may not be significant. This implies that the economic cost of taxing income from savings (at least to a point) is not large … [and] some tax on income from savings is likely to improve the efficiency of the overall tax system’).

Small business

With regard to small businesses, four issues are highlighted:

  • structures for operating small businesses: the various legal forms for conducting small business lead to different commercial and tax outcomes. Is there a better option that would deliver the sought-after commercial and tax outcomes but involve less complexity?,
  • interactions between the entity and owners: one important difference between the various forms is how they affect the tax position of the ultimate owners – for example, is it possible to retain income in the entity where it has suffered only moderate levels of tax; are entity level tax preferences washed out at the owner level? The Paper asks whether the interaction between the tax on the business entity and the owners should be rationalised,
  • compliance costs: the Discussion Paper sets out again well-known problem of the regressive impacts of tax compliance costs, and
  • complexity of the tax concessions: should the current suite of tax concessions for small businesses be rationalised?

Indirect taxes

Chapters 8 and 9 examine indirect taxes levied at the State and federal level.

GST. The possibility of changes to the GST has been one of the most prominent topics in the public tax debate in recent times. The Government made much of the fact that its White Paper process would be ‘comprehensive’ – ie, unlike Labor’s Henry review, the terms of reference for the White Paper would not rule out examining the GST.

Whatever the rhetoric, the reality is changes to the GST appear already to have been effectively ruled out. While the Paper spends quite some time analysing the GST and some of the problems with its current design and operation, the authors in effect tell readers at the outset, ‘don’t waste too much time here’ –

interested parties are welcome to put forward proposals to change the GST. However, the Australian Government will only consider progressing any such proposals if there is a broad political consensus for change, including agreement by all state and territory governments.

State taxes. With regard to the taxes levied by the States, the Paper gives them mixed reviews:

  • payroll taxes typically have a high tax-free threshold and a number of exemptions, and although the compliance burden for business which operate across State borders remains high, they are ‘a relatively efficient way of raising revenue.’  The claim about the efficiency of payroll tax is based on modelling a payroll tax without a threshold (after having acknowledged that a threshold is applied to the payroll tax in practice). This is one of a number of examples in the Paper of restrictive theoretical models being applied to the real world.  Yet in other places there is recognition that the results of theoretical models may not translate easily to the real world, eg, the Paper appears to doubt the current wisdom that there should be no tax on the return from savings,
  • land taxes again typically have a high tax-free threshold and many exemptions (land used as a principal residence) so that they are less productive than they might be,
  • gambling taxes are less productive than they should be, and
  • mining royalties calculated on the amount of the resource extracted are less efficient than ones based on the market price of the mineral.

The Paper reserves its most trenchant criticism for State stamp duties, describing them as ‘some of the most inefficient taxes levied in Australia.’ They are volatile, induce lock-in, are a barrier to labour mobility and are inequitable. Just how States would replace the 35% of their tax revenue generated by stamp duties on conveyances, vehicle registrations and insurance policies is not explored.

The indirect taxes levied by the federal Government receive a more favourable assessment:

‘indirect taxes can be an efficient way to raise revenue. If taxes are imposed on goods or services where demand is less responsive to price changes, then they have a relatively small distortionary impact on behaviour’

For example:

  • the fuel excise is regarded as quite efficient with ‘low marginal welfare loss’ compared to other taxes, and the problem of cascading (i.e., fuel excise being a cost to business outputs) is being handled by the fuel tax credit regime,
  • excise and customs duty on alcohol, ‘is complex [but] this reflects policy changes over time to meet multiple objectives — raising revenue, reducing the social costs of excessive alcohol consumption, and supporting wine producers and independent beer producers,’
  • tobacco excise generates a large amount of revenue,
  • the luxury car tax ‘has a narrow tax base, is complex … falls mainly on imported cars originating from a limited number of jurisdictions [although it] does not [explicitly] discriminate against imports,’ and
  • Australia’s remaining tariffs are not well regarded – they are expensive to collect, raise costs for business and do not raise much revenue (which is understandable since they exist in order to protect domestic producers).

The Paper makes an implicit case against starting a European-style financial transaction tax: they ‘distort decisions about mutually beneficial transactions… those that frequently engage in transactions will be taxed more heavily even if they are in a similar position to other taxpayers … FTTs can increase, rather than decrease, financial instability.

On the other hand, Treasury clearly likes the economic outcomes from user charging: they can ‘lower the cost to society of providing services, give the community greater say over whether they wish to consume (and pay for) the services and more directly influence the standard of service provided. In this way, user charges can be a useful way to help balance supply and demand for publicly-provided services.’

Operating the tax system

The last two Chapters of the Discussion Paper (10 and 11) address various aspects of the operation of the tax system, focussed around just a few ideas:

  • complexity: Australia’s tax system is ‘overly complex’ and ‘there is compelling evidence that simplifying the system would provide significant benefits to both the economy and the taxpayer experience’ but no-one agrees on where it is manifest, what causes it, how to measure it, or appropriate remedies. The Paper asks, what can be done?
  • administration: the ATO is being ‘reinvented’ and there is increased use of technology to help taxpayers meet their obligations. The Paper asks, how can the ATO lessen the impact of complexity and lower compliance costs?
  • policy formulation and review: several institutions in Parliament, the bureaucracy and the private sector are formally and informally involved in making tax policy and in reviewing proposals and legislative outcomes. The Paper asks, what would need to change to achieve ‘greater certainty, transparency and accountability to tax policy development?

Next steps

Treasury is seeking responses on the Discussion Paper by 1 June 2015. There are 66 questions, generally earnest and well-meaning in nature, in the Discussion Paper which are apparently intended to focus those submissions. Some are very open-ended (‘what should our individuals income tax system look like and why’); others are straightforward opportunities to offer opinions (‘what parts of Australia’s tax system, and which groups of taxpayers, are most affected by complexity’); some raise matters that have been the subject of years of inconclusive academic debate (‘to what extent does taxation affect people’s workforce participation decisions’); some are just odd (‘how important is tax as a factor influencing people’s decisions to work in other countries’). No doubt respondents will be selective in the questions they choose to answer.

Many of the questions are deserving of proper, empirical, research-based responses. However, based on the responses typically submitted in the past to exercises of this nature, the vast majority of respondents are unlikely to have either sufficient time, money and resources, or the inclination, to respond in such a fashion. Rather, the Government is likely to receive the usual mix of opinions, anecdotes and assertions.

One important step in the process, which does not feature in the official timetable, is the release of new modelling and empirical work undertaken by Treasury and the ATO for this project.  Some of the conclusions in the Paper are attributed to modelling done for the Henry Review, but several critical assertions in the Paper (‘the taxes with high long-term costs for living standards are company income tax and stamp duties’; ‘in the long run, over half of the economic burden of corporate tax is likely to be shifted away from shareholders through lower wages for employees and higher prices for consumers’;compliance with the tax system costs Australian taxpayers in the vicinity of $40 billion annually’) are said to be supported by yet-to-be-released Treasury and ATO work.  Once analysts see the assumptions and data underlying the work, an assessment of the cogency of some of these conclusions in the real world can be made.

The next scheduled step will be the release of an Options (Green) Paper ‘in the second half of 2015,’ and a further round of consultation on that Paper. The White Paper will be released in 2016 some time prior to the 2016 election. 

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Authors

Tony Frost

Managing Director

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Tim Kyle

Director

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Professor Graeme Cooper

Consultant

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Professor Richard Vann

Consultant

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