Tax Files: The future of tax in Australia – By Stephen Heath

The future of tax in Australia

STEPHEN HEATH, WALLMANS LAWYERS

It has been a source of little comfort to me to inspect the "Worldometer Coronavirus stats" website over the last 9 months; often to appease boredom in the early hours of the morning when struggling to sleep during March and April in particular.

As I write, the United States of America is said to have suffered 16,543,687 cases of Corona virus infection and Australia 28,024. Notwithstanding the larger population, an average American is 50 more times likely to contract the virus than the average Australian.

A case of “the tyranny of distance” as Professor Geoffrey Blainey once wrote? Alternatively, perhaps explicable by the fact that most Australians live on quarter acre blocks and can afford to buy hand sanitiser?

Far from being an expert on the matter, the discrepancy between the American experience and Australian experience does give cause to ponder matters such as the relative quality of our institutions and the trust reposed by Australian society at large in those institutions.

One might predict that institutions such as law enforcement, the Reserve Bank, the health system and the education system will not suffer from lack of relevance in the uncertain times ahead. The COVID response across Australia does suggest our society is more willing to follow and trust Government than one might have predicted and is likely to reinforce a strong belief in the quality of our health system.

That then raises the spectre of the capacity of our taxation system to manage the obvious challenge of spiralling Government budget deficits as well as the question of the efficacy of our taxation policy settings.

STATISTICS

Perhaps, surprisingly, Australia is not such a highly taxing country in relative terms; 28.7% total taxation revenue compared to OECD average in 2018: 33.8% (total tax revenue as a percentage of GDP).

However, when one unpacks what makes up the taxation revenues of the 37 OECD reporting nations, Australia is very much an outlier (all rankings determined as a percentage of GDP in 2018): • seventh lowest in goods and services tax collections; • seventh highest in personal income tax collections; • lowest in social security contributions; mention is rarely made of this form of revenue raising but of the 37

OECD countries only Australia and

New Zealand do not raise compulsory payments to Government to secure future contingent social security benefits; • third highest in corporate tax collections; • fourth highest in payroll tax; • tenth highest in taxing property. • [Source: Revenue Statistics – OECD

Countries Comparative Tables].

Other information of interest is as follows: 1. In 1901-02, Commonwealth, State and local Government revenues were only 6.3% of national GDP. By 1998-99 that percentage had increased to 30% [Source: ABS Australian

Taxation during the first 100 years of

Federation]. 2. In the 2020-21 income year, the 37% personal income tax rate will apply to taxable income in the $120,000 - $180,000 band. The 45% top rate cuts in at taxable income exceeding $180,000. By 2024-25, the 37% rate will be replaced by a 30% rate for taxable income in the $120,000 - $200,000 band with the 45% rate retained for taxable income exceeding $200,000 (all rates cited not including the 2% Medicare levy). 3. Currently, the $180,000 threshold for the highest tax rate in Australia

“cuts in” at only 2.2 times the average

Australian wage. By comparison, in the United States of America it is 8 times, in Japan it is 8.7 times and in the United Kingdom (a welfare state?) 4.1 times.

History tells us that as life in western society becomes more sophisticated and as the general populous lives longer and enjoys more wealth, overall tax rates increase.

What then of the future of tax policy in Australia in the years to come?

At some point, one must expect the belt to be tightened and therefore ongoing expenditure initiatives, JobKeeper and JobSeeker for example, will need to be tapered off. On the revenue collection side, one would need to be optimistic to think the economy will be capable of performing all the “heavy lifting”.

If the rest of the world is any guide and gleaning whatever one can from what Australian Governments are currently thinking, one might predict trends towards: 1. a higher rate and more broadly based

GST; 2. a reduction / elimination of stamp duty and payroll tax; 3. a broader and more uniform land tax system; 4. little pressure on increasing personal income tax rates and further pressure to elongate and flatten the income tax rating bands; 5. downward pressure on corporate tax rates but more pressure on foreign multi-national companies to pay more tax; 6. some discussion about what is referred to above as “social security contributions”.

What then of the impact of the Coronavirus on tax policy?

As commented above, Australian experience does suggest we have a more homogenous society than we might have thought and that our people will follow our leadership in times of national emergency. That suggests, for a Government with sufficient political capital, an increase in the GST would be capable of being “sold”. It also suggests considerable value and trust in our health system. That can only suggest political and electorate support for increasing aged care and health expenditure. An increase to the Medicare rate might not be surprising. National emergencies also accelerate the

trends towards nationalisation of service delivery and so one might expect, postCOVID, consideration to the effectiveness of the interface between the States in health policy and service delivery and a further progression towards national coordination.

MORE SPECIFIC OBSERVATIONS ABOUT TAX

One thing I have battled the most with over 30 years of tax practice is the logic of a tax system which sometimes rewards taxpayer indolence and which penalises hard working taxpayer enterprise. It is many the time that I have written (based on cases such as Jones v Leeming (1930) AC 415 and FCT v Whifords Beach 82 ATC 4031) that profit arising from an undertaking in the nature of trade will be on revenue account and that profit from the mere realisation of an asset will be on capital account.

The significance of the distinction has been ameliorated by the introduction of the capital gains tax, though amplified again with the introduction of the 50% CGT general discount (Division 115 Part 3.1 Income Tax Assessment Act 1997) and the small business CGT concessions (Division 152 Part 3-3).

Logic might dictate that tax be levied on gains, whether hard fought and a product of ingenuity and science or whether accidental. Whilst it may be considered something of a heresy perhaps the time has come for the distinction between income and capital to be downgraded as an arbiter of taxation outcomes.

The capital gains tax main residence exemption also raises important policy issues (sub-div 118B Part 3-1 ITAA 1997). There are considerable latent profits hidden behind valuable residential premises and a noted trend towards taxpayers working from home. Notwithstanding the comment above regarding the obedience of the Australian population, it is accepted that reform in relation to the principal residence would be quite courageous.

Other revenue distortions are, or have been, created by tax concessions such as instant asset write offs, research and development, concessions for early stage innovation companies, farm management deposits and the wine producer tax rebate. In practice, unfortunately, one often finds industry chasing the concessions as the first priority rather than the concessions being used to promote commercial best practice. The combined effect of all this is an unduly complex tax system driven by grandfathering rules and myriads of exceptions to general principles.

The difference between the lowest personal income tax rate and the highest personal income tax rate (0% and 45%) also causes tax distortions and structuring built around avoidance of incurrence of the 45% tax rate.

The issue, however, is that if there is downward pressure on personal income tax rates and the corporate tax rate and if stamp duty is on the way out how is the Government going to raise sufficient revenue in the next 10 years. One would be optimistic to think that the economy could do it by itself.

It would seem inevitable that the rate of GST will need to increase and that some other revenue raising initiatives will need to be introduced. There may also need to be a discussion about revenue raising through “social security contribution”.

EXPECTATION FOR TAX ADVISERS

The future for tax advice may involve the following:

1. At some point, a more aggressive taxpayer audit and review program being conducted by the ATO and

State revenue authorities. To date, the experience has been that the ATO has been a “soft touch” with respect to raising and chasing tax debts. This cannot be expected to continue. 2. The COVID experience can be expected to speed up what was an inevitable progression towards a cashless society, real time reporting of transactions and payroll and towards the automatic issuing of taxation

returns. Possibly, the death knell of suburban accountants making a living from tax return lodgements? 3. Conversely, for those advisers with strong innovation and bespoke advisory capabilities, the future may be bright. 4. The big “unknown” is the question of the capacity and desire of the ATO and Government to simplify the tax system and the administration of it.

For example, there might be something to be said for further flattening and reducing the income tax rates, eliminating some deductions and tax concessions together with increasing the rate of GST and broadening its base. One can see significant "Keating" type reform, together with enhanced information technology resulting in less return on labour for tax advice and more return on what might be coined

“tax advice capital”. 5. Advisers providing general tax advice are likely to suffer as the ATO builds its Rulings database and private advice services as consumers of tax advice become more capable still at sourcing advice on-line. The quantity and quality of ready-made tax information, without the need to contact a real person can only be expected to grow exponentially into the future.

CONCLUSION

There is a conflict for Government in future budgetary management as between downward pressures on personal and corporate income tax rates and expenditure requirements to support valued public institutions. If the consequences of Coronavirus are sufficient to render Government budget deficits a matter of national emergency, then meaningful tax reform may become politically palatable. If not, we can expect a slow recovery to budgetary stability and tax advisers to remain mired in tax legislation which is complex and internationally uncompetitive.

Tax Files is contributed by members of the Taxation Committee of the Business Law Section of the Law Council of South Australia B February 2021 THE BULLETIN 37