The overall mix of taxes — direct and indirect, personal and company — in Australia hasn’t changed much in the last few decades.
But the paying of income tax has increasingly fallen to individuals and companies, the wage earners and the businesses they work for.
In the 1950s, about 60% of taxes came from companies and individuals and this is now about 70% of tax received by the government.
Treasurer Joe Hockey, talking today about the White Paper on taxation, said:
“The world economy and the Australian economy is changing very rapidly, and the fundamentals of our taxation system were designed in the 1950s for a 1950s economy. We need to have a tax system that can cope with the 2050s, which is not that far away. But our world is changing rapidly. The digital economy is constantly changing the way consumers behave, the way they shop, the way they buy goods and where they buy them from. And of course our tax system is currently just a patchwork quilt of different taxes trying to come up with new sources of revenue to pay for new spending.”
It costs the federal government about $3.6 billion to administer the tax system. And the total tax compliance — what it costs the economy to collect, prepare returns and pay taxes — is in the order of $40 billion a year. For example, about 72% those submitting a return use a tax agent.
The tax system has a number of areas which are seen as increasingly unfair or are under strain because of global issues or because of disruption by technology.
Here’s what the White Paper says about the key challenges:
Without change, Australians will end up paying more and more in income tax. The process by which this happens is called bracket creep. It means, that as wages increase, more and more people will move into higher income tax brackets. This process tends to penalise lower income earners more. Average ordinary full-time earnings, now around $75,000 (and attracts an average tax rate of 22.7%), are expected to be $104,000 in 2023-24 (and paying 27.4% tax). However, a person earning only half that, about $37,500 (and paying 10.3% tax), would see their tax bill go to 17.8% when they reach $52,000 in 2023-24. Traditionally, government have made adjustments to the tax scales to readjust for bracket creep. One is due soon but, with taxes running below expectations, this may be delayed.
This is a 10% consumption tax, introduced in 2000 to replace a lot of smaller taxes, and is based on the principle: if you want something, you will pay tax. The downside is that the poor, or those on lower incomes, tend to pay more as a proportion of their income for the goods they buy. This is why there are so many exceptions to the GST such as fresh food, health, education and childcare. Much has been said on how small GST is compare to other developed countries in the OECD where the average is almost double Australia’s. However, holes are starting to appear in this system. With the ease of buying online, more goods are escaping the GST because people buy them from overseas suppliers local taxes don’t apply if the value if below $1,000. The GST is is Australia’s third-largest tax source, raising $56 billion, or 16% of total Federal Government tax revenue. The GST funds are distributed to the states and territories.
Couples are better off if they can organise their affairs to each earn exactly half, or near to, of household income. One could work three days a week and the other two, or something like that. Consider a couple with a household income of $100,000. If only one of them earns all of the total income of $100,000, then the tax is $26,947, or an average tax rate of 26.9%. However, if each earns $50,000 and pay $8,547 in tax each then the average tax rate is just 17.1%. They are better off by $9,853. Income splitting is a well know strategy used by people, mostly higher income earners, with access to trusts or private companies.
Corporate tax rates
The company tax system is under attack. In an increasingly globalised market, the Australian company tax rate of 30% is higher than many neighbours and competitors in Asia and can be a disincentive for companies to be based here. This also gives rise to companies shopping around for the best tax rates and basing their companies in, for example, Singapore or Ireland. This makes it harder for Australia to attract investment and harder to collect tax for business conducted in Australia by foreign companies. Australia relies more heavily on company tax than most other countries. In 2012, corporate taxation was 5.2% of GDP while the OECD average was 2.9%.
Money tends to go where it can get the best deal. And this is true of savings. There are different tax rates for different types of saving, from zero on the profit on the sale of the home you live in to the top marginal rate for money kept in a bank account. And superannuation gets a tax break. Australian households save primarily through home ownership (43% of total household assets), superannuation (15%), and other property, including investment property (15%). The system is further complicated by capital gains tax which, for example, applies to the profit on the sale of shares but only 50% of the gain is taxed if those shares have been owned for 12 months or more. The zero tax on homes means Australians tend to invest heavily in their homes.
Another aspect of the tax system which supports the housing market is negative gearing. This follows the underlying principle of the tax system that the cost of earning income is a deductible expense. So the cost of interest on a loan for an investment property is tax deductible because it is an expense of producing an income, in this case rent. The negative gearing part comes from the fact that the income is less that the interest costs. A noticeable consequence recently has been the increasing number of first home buyers buying investment properties because the tax breaks make this first step into the market a bit more affordable. Negative gearing can also apply to shares if an investor borrows and is paying interest to acquire the shares.
While everyone who has a wage gets the benefit of tax concessions for superannuation, it is generally high income earners who benefit most. They can contribute more to the concessional tax environment and therefore receive a greater benefit from the government’s tax gift. Pre-tax contributions are taxed at just 15% and income generated in the fund is also taxed at just 15%. When the fund converts to retirement income, the earnings are not taxed at all. As the population ages, and more people take a tax free income stream from superannuation, then the tax income from superannuation to the government falls. The total Australian superannuation assets are currently $1.93 trillion and growing.
The White Paper is aimed at starting public debate about tax reform. Responses to the paper are due by the start of June.
A Green Paper will be released in the second half of the year and key policy proposals are expected to be taken to the next federal election in 2017.