The tax institute publishes a 287-page reform want record to repair the “damaged” tax system

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Woman with head in hands with tax return on screen in the background.

Australia’s tax laws cost the nation about $ 50 billion in compliance costs, while inefficient taxes cost even more of lost economic growth, the tax institute warned.

Important points:

  • The Tax Institute report argues that Australia is too dependent on personal and corporate income taxes
  • It advocates a higher rate and / or broader base for the GST, which may include taxation on education, health and fresh food
  • The report says Australia’s super system is too complex and the tax breaks remain far too generous

As one of Australia’s leading membership groups for tax professionals, the Institute systematically attacked more than 10,000 pages of Australian tax law with a 287-page paper entitled The Case for Change.

At the beginning of the report, Andrew Mills, director of tax policy for the institute, said previous estimates put the cost of complying with tax laws at $ 40 billion, but that came from Henry’s tax audit more than a decade ago, and the cost are now likely to be more than $ 50 billion.

“A large part of these costs can be avoided if we address the systemic problems of our system instead of further optimizing at the margins,” he said.

“You can put as many plasters as you want on a broken limb, but it doesn’t change the fact that it’s broken.”

According to the paper, a primary reform goal is Australia’s increasingly complex pension system.

The report argued that it was almost impossible for non-experts to navigate the maze of caps and other rules.

Despite these efforts to contain the greatest tax breaks for high earners, most of the tax experts and practitioners surveyed in the report agreed “that the current structure of the taxation of pension insurance is far too generous”. .

“The fact that the taxation of contributions and income from the funds is levied at reduced rates for members during the build-up phase, but the cash receipts and benefits are tax-free during the retirement phase, means that the benefits are substantial and their affordability within the framework of the whole system is questionable, “he said.

The report proposes a complete overhaul of pension taxation so that contributions and income thereon are tax-free, while retirement benefits would be taxable.

Modest inheritance tax taken into account

He also highlighted the role pension insurance and property ownership are likely to play in transmitting wealth inequality across generations.

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“It is estimated that Australians over 60 will be transferring $ 3.5 trillion in wealth over the next two decades,” the report said.

“Notably, approximately 78 percent of the estimated assets transferred go to approximately 20 percent of the recipients.”

While it is noted that Australia is relatively rarely out of inheritance tax among developed countries, it is not strongly in favor of introducing an inheritance tax as they generally have relatively low income.

“When considering a capital transfer tax in Australia, we believe that each rate should be relatively low compared to other taxes, for example 5 percent above a certain threshold of, for example, $ 2.5 million or some other reasonable amount.” . “

Tax experts support negative debt and CGT reform

Despite Labor’s defeat in the May 2019 election when it campaigned for changes to cap negative gearing and capital gains tax (CGT) rebates, the tax institute’s report found that a similar type of reform remained on the agenda should.

“The application of the negative gearing regime in conjunction with the CGT rules creates the perception of a potential tax advantage and promotes investment behavior on the basis of CGT discount profits on sale or disposal,” says the report.

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This conclusion is in line with many real estate experts who argue that current policies have encouraged speculative investment and driven house prices higher.

The institute recommends limiting both tax breaks.

“There are strong arguments for a principle-based reform so that losses on investments should not be deducted from wages and salaries,” she argued about the negative gearing.

“Introducing rules to quarantine losses so they cannot be written off against wages and salaries would reduce the tax incentive for such investments.”

The report also found that the 50 percent capital gains tax rebate for assets held after more than a year has become much more generous in the lower inflation world since the tax was introduced.

“In simple math terms, that would mean the discount should be around 11 percent.

“Of course, such a discount rate would be politically unsympathetic, but the point of the comparison is that the current rate no longer reflects the policy it was originally intended to replace.

“It also runs counter to the tax treatment of other unearned income such as rent and interest.”

Lower income taxes, cheaper childcare, but higher GST

One of the key observations of the Tax Institute’s report is that Australia has too much income from income taxes, both for individuals and businesses, which is a drag on productive economic activity.

“More than two-thirds of Australian tax revenue comes from income and corporate taxes – roughly double the OECD average,” the report found, although many other developed countries have additional social security contributions for individuals or businesses.

“Most other advanced economies have relied much more heavily on consumer (or sales) taxation.”

This does not mean that Australians are over-taxed compared to similar nations, the report found.

“Compared to other OECD countries, Australia has relatively low tax revenues as a percentage of GDP.

“In 2018, Australia had a tax revenue as a percentage of GDP of 26.7 percent, while the OECD average was 33.9 percent and common comparison countries such as New Zealand and the UK were both 32.9 percent and Canada 33.2 percent.”

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Rather than further reducing Australia’s tax revenue, the institute argued that increasing the GST could be a way to bring the corporate tax rate down to a maximum of 25 percent (currently it’s 30 percent for large corporations and 25 percent down). small and medium-sized) and further lower income taxes.

“Without increasing the GST rate by 10 percent, adding some of the top GST-exempt items to the base could increase sales by $ 21 billion,” the report said.

“Alternatively, increasing the existing base by just 2.5 percent (equivalent to a GST rate of 12.5 percent) would increase sales by $ 14 billion.

“If the tax base is expanded to include some of the major items currently exempt from the GST and taxed at a lower rate of 5 percent while taxing the existing tax base at 12.5 percent, the potential revenue is $ 25 billion.

“If all items that attract GST, including the currently exempt items, are taxed at 12.5 percent, the increase in sales will be $ 40 billion.”

Though the institute added, “there needs to be adequate compensation through the transfer system and a reduction in income tax rates to compensate low and middle earners”.

One group of income earners in need of tax breaks, according to the report, are working parents who are the main caretakers of their children, mostly women.

Women affected by taxes and transfers

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Women partners with children, who are typically the primary caregivers, can lose almost all of their income from doing more work due to the way taxes and childcare allowances interact.

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“Primary carers can pay the net cost of working an additional day once the marginal effective tax rates are added to the cost of the childcare itself,” she noted.

“This should be seen as one of the most fundamental flaws in our system.”

The proposed reforms are “either the expansion of the childcare subsidy or nationwide free childcare”.