State of the Nation: Why we need tax review for the 21st century

There have been numerous tax reviews in Australia in our recent past, most notably, the Asprey Review of 1975, the Ralph Review of 1999 and the Henry Review of 2010. 

Given our last review was only five years ago, the obvious question is why another?  Broadly, the answer comes from the tax discussion paper itself – the world is changing and Australia’s tax system needs to change with it.  This need for broad reform of Australia’s tax system has been recognised for several years.

In 2013, the National Commission of Audit, chaired by Mr Tony Shepherd, was established.  It delivered its Phase One Report in February 2014 and the Phase Two Report in March 2014.  Most notably, from a tax perspective, the Commission Report stated that “the vertical and horizontal fiscal imbalances within the Federation are a major impediment to growth and prosperity”.  On this basis, it recommended that states should be given access to the Commonwealth’s personal income tax base. It also recommended a pro rata distribution of GST with top ups to the supported states. 

The Commission acknowledged that the elected government had a right and obligation to determine any reform path but suggested that doing nothing was not an option.  Subsequently, the Reform of the Federation Issues Paper and the Reform of Australia’s Tax System Discussion Paper have been released by the Government.  The aim is for the Federation White Paper to be closely aligned with the White Paper on the Reform of Australia’s Tax System.  

The Tax Discussion Paper, designed to encourage broad conversation around tax reform, has the mantra ‘lower, simpler, fairer’.   The Paper asks 66 separate, non-limiting questions. with the Government receiving more than 500 submissions by 1 June 2015. 

At the same time, the Organisation for Economic Cooperation and Development (OECD)/G20 Base Erosion and Profit Shifting (BEPS) Project is well underway with final recommendations due by the end of 2015.  No doubt, this adds another layer of complexity to tax reform discussions. 

While the debate over fiscal federalism abounds, so does the debate over fiscal sovereignty.  The two will need to be considered in tandem. The National Commission of Audit Report, the Tax Discussion Paper and the OECD/G20 BEPS project leave little doubt that Australia must reform its tax system. 

At the outset of this process it is important that Australia determines what that tax system should look like.  There will always be competing interests and competing objectives, for example, raising State revenue versus Commonwealth revenue, adequately taxing foreign investment returns versus attracting foreign investment, raising taxes versus providing incentives, and simplicity versus equity, to name a few.  This is no simple answer to what Australia’s future tax system should look like but it does need to be discussed within the context of both fiscal federalism and fiscal sovereignty. 

Dialogue around tax reform is clearly on the public agenda with the results of CEDA’s 2014 Big Issues survey of the business community supporting the view that tax reform should be a priority.  Findings include the broadening of the GST tax base which is ranked as the most important in terms of priorities.  Removing certain welfare breaks, increasing the rate of GST and lowering the company tax rate are also in the top six priorities. 

Public submissions to the Tax Discussion Paper support these findings and so far indicate that the broadening of the GST, along with increasing its rate, negative gearing, capital gains tax, superannuation contributions and the reform of company tax are imperatives in tax reform discourse. 

Three issues that have already attracted a deal of media attention - broadening the base and increasing the rate of GST, superannuation concessions and multinational tax avoidance.  The estimated cost of some of these measures within the current system can be found in the annual tax expenditures statement.  It needs to be recognised that tax expenditures differ from direct expenditures as they are a measure of revenue forgone due to an exemption, deduction, offset, concessional rate or deferral of liability.  As such, they are often ‘hidden costs’ within our tax system.

Tax expenditures play an important role in the tax and transfer system.  However, their cost in terms of revenue foregone is significant.  In the 2014 Tax Expenditures Statement it is estimated that the revenue forgone for the 2014-15 financial year due to the GST exemption on food, education and health total approximately $14 billion.  Concessional taxation of employer superannuation contributions and superannuation entity earnings total $16.3 billion and $13.4 billion respectively in revenue forgone.  These are two areas that need to be examined as part of a comprehensive review of Australia’s tax system. 

GST, specifically excluded from consideration in the Henry Review, is likely to be front and centre of the current reform dialogue.  It is also centred on the issue of fiscal federalism.  However, international comparisons are inevitable and if we compare Australia to similar jurisdictions, both a broadening of the base and an increase in rates does seem to be needed. 

Australia’s rate is approximately half of the average GST rate of OECD countries, with the base covering approximately 47 per cent of the consumption of all goods and services, with the OECD average at 55 per cent and New Zealand as a comparison at 96 per cent.  Obviously, changes to the GST regime would need to involve appropriate transfer payments to ensure lower-income households are not disadvantaged.

Reforming Australia’s international tax regime takes us from fiscal federalism to fiscal sovereignty.  Unfortunately, there is no figure which we can use to demonstrate the magnitude of the problem of multinational tax avoidance and aggressive tax planning.  However, the cost is likely to be billions of dollars. 

Again, the elected government has a right and obligation to determine Australia’s reform path.  However, unilateral action is more likely to appease the general public than address the problem in any meaningful way.  Genuine international engagement and multilateral action is essential in addressing BEPS.  To this end, the adoption of OECD/G20 BEPS project recommendations, along with the introduction of the related automatic exchange of information initiative will be significant in terms of reforming Australia’s international tax regime. 

The world is changing and Australia must change with it.  The above discussion highlights just two areas of tax which are likely to face significant reform – GST and international tax rules.  While the mantra of the tax reform outcomes may be lower, simpler, fairer, it is likely that the process of genuine reform itself will be extensive, complex and multifaceted.

Professor Kerrie Sadiq participated in CEDA's State of the Nation conference, click here to watch videos.