JOE HOCKEY: Australia’s tax system is not set up for the digital, globalised economy

Joe Hockey. Photo: Getty / Stefan Postles

Facebook doesn’t employ journos but is quickly becoming a news behemoth. Uber doesn’t own any taxis but shuttles millions every day. Airbnb doesn’t operate any hotels but is a massive accommodation provider. And Alibaba is one of the most diverse retailers but doesn’t have any shopfronts.

Today Joe Hockey wheeled out these facts again to illustrate how quickly the global economy has changed in a matter of years.

Disruptive business models that are an increasing feature of the global economy and governments around the world are grappling with how to regulate them and set appropriate tax policies, both to collect the right revenue but also to ensure high-growth businesses can be established and thrive.

Over the weekend Hillary Clinton made the on-demand sharing economy an issue for the US Presidential race when she vowed to “crack down” on employers who misclassify workers as independent contractors,” calling it “wage theft”, While she didn’t name names, it’s an issue that has been challenging Uber, now worth $US50 billion. and its entrepreneur CEO Travis Kalanick. after the California labour commission ruled an Uber driver was an employee, rather than an independent contractor, and thus entitled to benefits.

Uber – the world’s largest taxi company, and it doesn’t own a taxi. Photo: Getty Images

Hockey used his address at the PwC Tax Reform Forum in Melbourne to talk about what the digital economy might mean for Australia’s taxation system.

There are already signs Australia’s tax system is being left behind by new types of businesses. This year’s federal budget included a so-called “Netflix tax” which will attempt to make online content providers from outside the country charge GST to customers.

From 2017 the tax will scoop up services including Netflix, which currently doesn’t charge GST, while local streaming media players such as Presto, Stan and Quickflix must.

The government also altered the employee share scheme which means employees of eligible startups won’t have to pay tax up-front on options, before they’ve earned an income from them. The state governments are also looking at the GST low value threshold on imported goods costing less than $1000.

“But while these changes will make a big difference, there is still more to be done and the Government will continue to look at ways to make improvements,” Hockey said today.

“We have a tax system with 1950s rules that simply don’t fit with the modern, globalised economy.

“This is not about short-term fixes and yet more band-aid solutions for our tax system. Nor is it [The Ken Henry Taxation Review] Mark II or about turning the tax system on its head with a brand new tax.

“We need to make sure our tax system is set up for the next 40 years, not just playing catch up with new industries as they develop.”

For Australia to be ahead of the innovation curve it needs to stop charging a premium, in the form of personal income tax rates, to for talented entrepreneurs to live in the country. Hockey pointed out that Australia’s top tax rate is 47 cents in the dollar while New Zealand’s is just 33%.

“There is a strong view that our corporate tax rate is uncompetitive, and that our personal income tax rates are seeing some of our best and brightest move to lower taxed countries,” Hockey said.

“Our tax policies alone will not determine how much of the global talent pool is attracted to Australia, but our tax rates should not be set at levels that push the talented away.”

The government last year flagged a number of key industries as growth favourites, including advanced manufacturing, food and agribusiness, medical tech, mining tech and oil, and gas and energy resources which will receive $225 million in government funding over the next four years.

But Hockey says one thing he’s learnt is you can’t “pick winners”.

“One of the lessons of this digital disruption is that our tax system should not favour one type of economic activity or punish another, because what these businesses have shown is that digital disruption is real. It simply won’t work if governments try to tax or legislate them out of existence,” he said.

Hockey recognised over-regulation runs the risk of killing these new tech companies, something which could hurt future tax flows in Australia.

“We need to continue to make it easier for entrepreneurs to get new businesses up and running. The next Cochlear, the next Google or the next Facebook might already be an idea in the mind of a bright young Australian,” he said.

“But this isn’t much good if we don’t have the right tax setting to encourage bright young Australians to commercialise their ideas.

“We need to encourage innovation. We need to encourage new enterprises. And we must ensure that those who are behind them are being adequately rewarded for their intuition and not punished for it through restrictive tax or regulatory environments.”