How do we achieve holistic tax reform?

19 February 2019

Recently, I was interviewed by the Australian Institute of Company Director's (AICD) where I discussed the findings from BDO’s 2018 Tax Reform Survey and how Australia has been tinkering around the edges of holistic Tax reform for over a decade. As the macroeconomic landscape changes, some of the issues Australia faces include:

  • Demographic challenges - an aging population and the rise of the millennial generation
  • Changes in working practices
  • Technological disruptions.

As these changes unfold, Australian tax reform cannot remain stagnant while other countries move ahead. Key considerations are that we should broaden the base tax rate, consider raising the GST and focus on having a tax system that is globally competitive.

Why should we broaden the base?

Over the past decade, Australia has made minor tax reforms such as tightening up thin capitalisation rules and getting rid of the investment allowance. These progressive attempts to broaden the base have resulted in increased revenue being raised but that revenue has not been used to reduce tax rates.

nstead, governments have used the revenue raised to bring in specific concessions, like the currently debated small business write-offs. These piecemeal concessions chew up the capacity to do anything around tax rates and leave Australia with a tax rate that is high internationally.

Another issue is that the reduction to rates for small business has produced a two-tier system. For some companies, it may not be worth expending the resources to determine whether the reduced corporate tax rate of 27.5% is available. That is when you overlay the fact that it affects your franking credits, the value of those credits and the flow on effect to shareholders, some companies get to the point where they say, "It's all too hard. Just pay 30% and forget about it."

What is preventing real tax reform?

The three-year electoral cycle is partly to blame for these outcomes. Three-year thinking leads to specific tax concessions directed toward specific taxpayers such as the small business asset write-offs. Some may argue these concessions stimulate the economy but cynics may say that both sides of politics are using piecemeal tax reform to attract votes. Either way, it's short term thinking. It's not about building a long term, sustainable tax system.

The electoral cycle produces communication problems as well. The debate never goes beyond the headline tax rate and we look uncompetitive internationally. Whether that's true and fair or not is another question, but people don't go into that level of detail. There’s not enough discussion about how much tax is being collected, how you calculate it and what the compliance costs are.

Putting GST back on the table

If you look around the OECD, the average rate of GST/VAT is in excess of 19%. We're at 10%, and our GST is not as broadly applied as some countries. There are a number of benefits of putting the GST rate up to fund income tax cuts. It impacts consumer behaviour and shifts taxing away from income generation to consumption. Increasing GST would likely encourage people to earn more by lowering the tax on an extra hour of work. Similarly, it will impact productivity because people are not going to be taxed as much on their income. Conversely, it will disincentives people from spending, therefore encouraging saving. With the current level of consumer debt in Australia, this makes it an attractive policy to pursue.

The silent cost to businesses

The problems with tinkering around the edges of tax reform are numerous. As a society, we end up with layers of legislation giving rise to layers of complexity, specifically layers of anti-avoidance rules. And the consequence is, someone may just be running their business, not doing anything mischievous, but all of a sudden they have all these rules and complications to deal and comply with. With complications comes compliance costs and from an economic perspective that's unproductive time. The complexity is taking people away from their businesses and spending money on non-income producing activity.

BDO is heavily engaged in the tax reform process and committed to broadening the debate to involve more than just those who have a vested interest in the status quo. To hear my thoughts on this issue, please see the video interview posted on the AICD website. If you have any questions about this topic, please feel free to email me at [email protected].

Tax is a topic of discussion for this year’s Federal Budget. BDO in Australia delivers a comprehensive analysis of the Australian Federal Budget each year – find out more.