Company directors want negative gearing reform, a GST hike, and personal tax cuts

A gun salute before the ceremonial welcome of China’s Premier Li Keqiang at Parliament House in Canberra. Mark Graham/AFP/Getty Images

Australia’s company directors, frustrated at what they call policy and governance paralysis in Canberra, have proposed their own radical reforms.

They include lifting the GST rate to 15% from 10%, cutting personal and company taxes, reducing the capital gains tax discount to 40% from 50% and reforming negative gearing so it doesn’t apply to housing.

Other reforms include fixed four year terms for the House of Representatives and eight years for the Senate to encourage longer term thinking by politicians.

The Australian Institute of Company Directors (AICD) today released Governance of the Nation: A Blueprint for Growth, ahead of the federal budget due next month.

“It’s time to stop tinkering around the edges and deliver a real plan for our future,” says AICD Chairman Elizabeth Proust.

She says Australia’s national governance, which has remained largely untouched for over a century, needs to change.

“Our democracy, and the public’s confidence in it, cannot be taken for granted,” she says.

“Four year terms to reduce short-term thinking, and a review of state and federal responsibilities, are two measures that can be taken now to improve the governance of our country for the future.”

Proust says Australia has many strengths, but to take advantage of them, leaders in all fields have to play a role in advocating reform.

Source: AICD

“Despite the clear need for substantial reforms, especially in regards to our taxation system and structures of government, we seem stuck in policy limbo and partisan paralysis,” she says.

Negative gearing

“Negative gearing is a part of many Australians’ investment plans,” says the AICD report.

“However, it has led to ineffective tax outcomes and, in part, distortions in the housing market.”

The AICD says negative gearing encourages investment in relatively unproductive assets, such as existing residential property.

“While the shortage of housing stock and record-low interest rates are the main drivers of housing affordability challenges, current tax arrangements also play a role,” the AICD says.

“Negative gearing should be reformed so that it applies only to productive assets.”

The AICD didn’t give a specific recommendation on how negative gearing should be changed.

However, it did point to the nexus between negative gearing and the capital gains tax discount which the Reserve Bank believes “may have the effect of encouraging leveraged investment in property”, particularly in an environment of low interest rates.

“Government should examine all options for reform of negative gearing (the tax deductibility of losses) on housing,” it says.

GST and Personal Tax

The AICD is proposing a 15% GST rate and a broader base for the tax, to include fresh food, education, healthcare, childcare and utilities, to raise additional $273 billion over four years.

The company directors say this would allow marginal tax rates to be reduced by 6.5 percentage points and some compensation paid to low income earners in the form of increased welfare payments.

And removal of work-related deductions would allow the top personal tax rate to be cut to 37% from the current 45%, bringing Australia more into line with global averages.

Company tax

The AICD says Australia’s 30% corporate tax rate stands out as one of the highest in the developed world and above the OECD average of 25%.

The average corporate tax rate in countries in our major trading zones in Asia is 22%. Only four countries in the OECD have a corporate tax rate higher than Australia’s.

“The AICD acknowledges the government’s attempts to lower the tax burden progressively over the next decade,” the report says.

“However, we consider the best approach is to ensure that corporate tax is part of a comprehensive reform model, rather than piecemeal changes.”

The federal budget deficit is $36 billion and spending is forecast to stay above 25% of GDP over the next four years.

AICD chief economist Stephen Walters says this is unsustainable and must return to pre GFC levels of about 23%.

“It is clear we have a spending and a revenue problem,” he says.

“It’s time to tackle both, with cuts to industry assistance, middle-class welfare and efficiency dividends on one hand, and comprehensive tax reform on the other.

“We need to get our tax mix right, by taxing smarter, not higher.”