On 30 March 2015, the Federal Government released the much-awaited tax discussion paper, “Re:think – Better tax system, better Australia”, which begins the conversation regarding the future reform of Australia’s tax system. 

The discussion paper seeks to set the scene for the broader tax reform debate and focuses on ideas for potential reform (rather than specific solutions). In doing so, no reform or subject matter is ruled off limits. The paper notes that “solutions can start to be considered as part of the options (green) paper in the second half of 2015”

Formal submissions in relation to the matters canvassed in the discussion paper are encouraged. Submissions are due on 1 June 2015.

Overview of discussion paper

The Australian Government has released tax discussion paper “Re:think – Better tax system, better Australia”. The paper forms the foundation of the release of an options (green) paper due in the second half of 2015, followed by a white paper leading into the 2016 election.

The discussion paper seeks to examine Australia’s tax system through a first principles approach. It is a “focus on ideas rather than prescribing solutions” which are to come as part of the options paper. The paper notes that the Government will “rule nothing in or out” at this stage. However the matters raised and discussed in the paper give a clear sense of the areas the Australian Government sees as being of higher priority.

Complexity of the Australian tax system is the overarching theme of the paper, as is decreased reliance on income taxes in favour of consumption taxes (such as the GST). The paper encourages readers to consider how the overall tax system can be reformed in this light (whist still promoting equity and efficiency).

The time is right for a review of Australia’s tax system. King & Wood Mallesons’ Directions Report 2015 noted that more than 50% of directors surveyed want “big ticket” reform of tax laws. The staged consultation process provides a valuable opportunity for those interested in tax reform to suggest new and innovative ways to approach taxation in Australia while also providing a forum for key problems to be raised as part of a wide and comprehensive review. We are intending to make submissions to the Government as part of the consultation process.

Challenges for Australia’s tax system

The main sources of taxation collected by the Federal Government are from income taxes levied on individuals and corporations, as well as taxes on property. In this regard, Australia relies much more heavily on income taxes (both company and individual) and property taxes than most other developed economies. The paper identifies that income taxes can operate to distort efficient commercial activity in Australia and impede Australia’s ability to compete in international markets.

As a result of Australia’s heavy reliance on income and property taxes, Australia has a materially lower reliance on consumption taxes (such as GST). The paper notes that this may not be ideal as consumption taxes have a low economic cost relative to other taxes.

The complexity in the design of the tax system is also a major driver of economic inefficiency and increases uncertainty and risks for taxpayers. This is evident by the current tax compliance costs, estimated at $40 billion a year. The paper is seeking potential reform options to reduce the compliance burden on taxpayers.

The paper also provides a number of examples of other areas that can distort behaviour in the market, including differential taxation of income and capital (as a consequence of provisions such as the discount capital gains concessions) and the dividend imputation system.

Summary of key issues highlighted

In the discussion paper, the Government has identified a number of key issues that may present scope for possible tax reform. The main issues that have been canvassed are:

  • Corporate tax – Australia’s corporate tax reliance is high compared to many developed nations. The paper notes that this reduces the level of investment in Australia and impedes productivity, innovation, employment and wages. A range of possible reform initiatives have accordingly been suggested in relation to Australia’s business tax system. Some of the possible areas for reform canvassed have been raised before (including dividend imputation) whilst there are some newer areas (such as removing the bias towards debt funding).

    The Government has also noted that the tax distinction between revenue and capital items will be discussed, as will the possibility of greater alignment of the calculation of “profit” between tax and accounting systems. Further, the paper confirms that the Australian Government considers that there is a case for extending the range of collective investment vehicles that can be offered by Australian fund managers.
  • GST – GST is one of the more efficient broad-based tax systems in Australia. In this regard, a key suggestion of the paper is that there is scope for significant economic gains in relation to GST reform. Possible areas of reform are noted as including a change in the GST rate (which currently sits at 10%) and a broadening of the GST base. The paper stresses that whilst these are reform options, the:

    Australian Government will not support changes to the GST without a broad political consensus for change, including agreement by all state and territory governments”.
  • Savings – The tax treatment of domestic savings is also examined, and the paper highlights a number of efficiency and equity issues in the current arrangements. The key matters raised by the Government relate to the rationale for the CGT discount, the concessional tax treatment of superannuation and the impact of the dividend imputation system on savings decisions. As publicised in the media, the Government has also questioned the role that negative gearing plays in driving investment in rental properties. We expect that this topic will form a key part of the options paper.
  • Small businesses – Australia’s current tax system is disproportionately burdensome on certain small businesses. In particular, compliance tax costs are felt most by small businesses and the various tax concessions and entitlements designed to benefit small businesses in fact add to the compliance burden. In response to this issue, the paper emphasises a number of possible reform initiatives in connection with small and medium enterprises. These could include the creation of a US style S-Corporation (so as to create a flow-through entity where all taxation occurs at the individual income level rather than in a company) and a low or zero tax rate for small businesses.
  • Indirect and state taxes – The paper considers a range of levies on specific goods and services (such as fuel taxes, alcohol taxes, tobacco tax, the Luxury Car Tax, agricultural levies and tariffs), as well as the state tax system. The key concern with these taxes relates to their practical inefficiencies and complexities in the context of a modern economy. The Government has emphasised a clear view of improving the appropriate mix of taxes in these areas. The paper also highlights a number of corrective taxes which are not currently imposed in Australia as part of a possible reform initiative, including congestion reduction taxes, sugary drinks taxes and user charges (including cost-reflective road pricing).
  • Individuals – The key concerns noted in the discussion paper in relation to individual taxpayers in Australia relate to “bracket creep” and economic distortions resulting from high marginal tax rates. The Government has also recognised that tax offsets provided to individuals may not be well-targeted at present and may need to be subject to specific reform as well.
  • Not for Profit (NFP) sector – Tax concessions for NFPs provide many benefits for society but are expensive to maintain. Three concessions have been singled out by the Government for review to ensure they continue to meet their policy objectives - fringe benefits tax concessions, income tax exempt status and deductible gift recipient status. These concessions have been flagged as an area for possible reform in light of the significant costs to provide them.

Complexity and administration

The paper recognises that the complexity of Australia’s current tax system is a major hurdle towards achieving a “better tax system that delivers taxes that are lower, simpler, fairer”.

As part of a broader deregulation agenda, the Government is seeking to reduce the costs of compliance and volume of regulation. The government’s approach to deregulation has three main features. These are:

  1. Using an enhanced regulation impact statement process to provide quality assurance for the flow of new regulation;
  2. Systematically reviewing existing regulations in the context of a net annual red tape reduction target of $1 billion per annum; and
  3. Establishing a new framework for assessing regulator performance.

In King & Wood Mallesons’ Directions Report 2015, tax regulation and compliance has been noted by companies as a key area where reduction in red tape would be beneficial.

Next steps

The Government has announced that it will be conducting consultation with interested stakeholders regarding the issues and options for reform highlighted in the paper. The Government has called for submissions on the discussion paper by 1 June 2015.