02 October 2020

It might not come on budget night yet Australia is in great need of tax reform

In less than a week the Federal Government will deliver the 2020-2021 budget, with multiple commentators suggesting that the size of the spending to be revealed on October 6 will shock many observers, describing it as an "astounding" injection of assistance into the economy.[1]

One of the big-ticket questions is will the government look at key tax reform measures as an opportunity to re-boot Australia’s economy?

We believe that tax reform should  play a major role in transitioning the country out of the COVID-19 crisis.

Some of these reforms have been on the government’s agenda in the past.

  1. Broaden the revenue reliance on GST

The GST was introduced by the Howard government 20 years ago. It has remained at a flat rate of 10% on applicable domestic supplies of goods and services in Australia. 

Many, including some State and Territory governments, have been advocating for either or both the GST rate to be increased and/or for the base to be broadened.

The GST revenues have grown slower than the economy, due to:

  • the tax base having significant exclusions, including fresh food, education and health;
  • lower prices of goods and services because of strong competition from international online retailers (hence decreasing the GST revenue); and
  • increased domestic spending on GST exempt services, such as healthcare.[1]

This call from certain States and Territories has grown stronger in light of decreased revenues and increased spending due to COVID-19.

Changing the scope of the GST regime is a politically sensitive issue. It should involve agreement between the Federal government and the States and Territories. The COVID-19 crisis has developed an atmosphere where governments have been willing to test options for genuine reform.  The working-groups developed to explore options to reform Australia’s industrial relation system – another politically sensitive topic is a great example.

An increase in the GST rate and the broadening of the GST base support budget repair in the post-COVID economy. It may also be used as an impetus to remove or reduce less efficient State and Territory taxes.  Particularly, payroll tax (which is essentially a tax on labour) acts as a disincentive to expand operations in the economic recovery from COVID-19.  An increase in the GST rate may support the States and Territories to remove their respective payroll tax regimes, rather than their current approach of temporary waivers and deferrals.

  1. Superannuation must be simplified

Another area for reform which has remained contentious is superannuation.

There is a need to make the superannuation rules less complex, more accessible and more flexible.  

The lack of flexibility have been illustrated by the need for the recent Superannuation Guarantee Amnesty. It was required to allow employers to declare previous superannuation guarantee shortfalls without the risk of administrative fees or penalties. 

The recent case law regarding the status of “employees” and “contractors” has further exposed fundamental issues with the clarity of the current rules. The severity of automatic penalties applied to superannuation guarantee shortfalls may also need to be reviewed.

Given the present environment, real consideration needs to be given to the planned increases to the minimum employer superannuation contribution rate, which is set to rise to 10% by July 2021 and up to 12% by July 2025. 

There are also concerns relating to inequality in the superannuation system, with women, Indigenous Australians and casual workers usually retiring with lower amounts of superannuation.

  1. Remove taxes which impede investment and transactions

To stimulate the economy in a post-COVID environment, the government is expected to have a focus on domestic investment. 

The tax concessions relating to the higher thresholds and amounts for the instant-asset write-off are expected to remain.  We do not believe this is sufficient to generate significant growth to stimulate an economic recovery. 

Broader reform, together with the States and Territories is critical.

The stamp duty regimes that apply across Australia for transactions involving property are a significant barrier to investment. They affect a large proportion of the economy. Stamp duty has historically generated significant revenue for State and Territory governments. It is clear it is a very inefficient tax.

The Federal government cannot deliver all of these reforms alone  (as some of the taxes are imposts of the States and Territories). It is critical to leverage the National Cabinet mechanism to assist the States and Territories to deliver suitable, uniform reforms.

[1] “2019 report ordered by the New South Wales Treasurer, the NSW Review of Federal Financial Relations”

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