Tax has long been a pain point for Australian businesses, with some of the latest concerns highlighted in this year's edition of the BDO Tax Reform Survey. We spoke to Lance Cunningham, National Tax Director at BDO, to take an in-depth look at the most pressing issues.
1. What do you think are the main issues with Australia's current tax system?
The biggest problem here is a structural one, around whether or not Australia's tax system is in the appropriate format.
The key with tax is to ensure it is simple, fair and efficient - that's the mantra for tax systems. The trouble with that is that there's a trade-off between those three. In other words, a simple system doesn't necessarily mean it will be fair, so the complexity of the system is sometimes there in order to ensure fairness.
I think at the moment we have too much complexity and I think that can be reduced without having too much of an impact on the fairness of the system. Therefore we need to have a review - a holistic one - to get the right mix.
The Prime Minister’s recent comments on changes to the GST being unlikely during this or the next terms of Parliament are not encouraging in relation to a holistic review of the Tax System. We encourage the Federal and State Parliaments to look to the benefit of the whole of the Australian community and ensure a comprehensive review of Australia’s tax System.
2. GST and state taxes were highlighted as key pain points by respondents to the survey. What exactly is problematic with them?
GST is an efficient tax; it's reasonably fair except for the fact that you've got certain exemptions - and there's also the question about whether or not the rate is right. The rationale for bringing in the GST and giving the revenue to the states was that it would enable them to review their taxes, and get rid of their inefficient or inequitable ones.
They've done that to some extent, but not as much as was expected when the GST was brought in. The GST is seen as a modern and efficient tax that could actually replace some of these archaic taxes that the states are currently using, particularly stamp duty.
While stamp duty could be seen as efficient, it is very unfair because it is usually only paid by those people that are acquiring assets. Imposing stamp duty at the point of acquisition puts a disincentive on acquisition of land and expansion of businesses. This is a particular problem for families that want to upscale their housing to fit an expanding family, or conversely, where children have left home and the parents are looking to downscale their housing.
There are also issues around payroll tax - it's quite an efficient tax to collect but it is seen as a disincentive to employing more staff. This could be fixed by abolishing payroll tax and replace the States’ revenues with increased GST rate or a broadening of the GST base.
Another alternative for payroll tax reform could be to keep the payroll tax but reduce the tax rate and reduce or eliminate the exemption thresholds. By spreading the tax over more employers it would allow a substantial reduction in the rate. However given the substantial opposition to payroll tax as evidenced in responses to the BDO Tax reform survey, such a change would require a hard sell by the Federal and State Governments. However, if it was proposed as part of a holistic review of the whole of the tax system it may be easier to sell to businesses.
Such a holistic review needs to include the GST, including whether we have the appropriate rate. Our 10 per cent rate is very low compared to the 15 to 20 per cent in other countries with GST/VAT, so there's certainly room to move there.
3. What are the most urgent steps the government can start taking now to improve the tax system?
What we need is a holistic review of the tax system. A number of recommendations have actually been implemented from the Henry review, but there's still a lot there to work through.
The Henry review didn't include GST, for instance, and that was a really big factor in the tax system. What we need now is for that review to include not only GST but also the state taxes. We need to get rid of any taxes that don't have good policy reasons for being there, like stamp duty.
We need something more than what we've got with the Henry review - an assessment of the whole system, including both federal and state tax.
4. What recommendations from the Henry review need to be addressed first to initiate reform?
The fact it didn't include GST was one of the worst parts of the review. There are also a lot of things in the review that taxpayers may not like, for example the recommendations to review the imputation system. However what we need is a holistic review with all possible changes being put on the table for consideration.
We should also be having a close look at fringe benefits tax - it's another overly complex system.
Tax reform around trusts is also something both the previous federal government and the current federal government have had a look at and we have seen some trust taxation changes in recent years but some of them have in fact complicated the tax system even more. Federal Treasury has had another look at how to tax trusts and we are expecting some changes for managed investment trusts soon. However the proposed changes for other fixed trusts and discretionary trusts is bogged down in Treasury, and looks like it is going nowhere because there are simply too many problems with it the proposed changes.
Many small businesses in this country use a structure that is a combination of a trust and a company as it gives them flexibility and in many cases assets protection. However, that structure requires small business to deal with some of the most complex provisions in the Tax System including the trust taxing provisions and Division 7A for private company loans, payments and debt forgiveness to shareholders and associates.
The government can definitely play a role in establishing a new small business structure as an alternative.
5. What can be done to make the tax system easier to understand, especially for small businesses?
Trust structures are actually one of the most complex types of business structures available, but they've been used because they are very flexible. BDO has suggested to the government to establish a new small business structure that combines the flexibility and asset protection features of the combined trust and company structure but without their current complexities.
For instance, we could evaluate the possibilities of introducing the look-through company structure, like what they have in the US. That would reduce a lot of the complexity.
Of course, there are also issues around the preparation of reports and compliance forms that businesses generally have to lodge. Small businesses don't have dedicated staff to do that. There needs to be a push from current government to reduce that complexity.
6. How does Australia's tax system compare on a global scale? Does it lag behind many of our competitors?
Australia has a much lower GST rate than many other countries, so there is some room for expansion here. I'm not necessarily advocating an increase in the rate, but it should be available as part of the review. The onus is really on the Government to come up with the right balance in relation to its collection of taxes.
With regards to income tax, while Australia's individual tax rates could be reduced; they are comparable to many other countries of our type or economic size. Where we are out of the ball park, though, is in relation to corporate tax. The current rate is 30 per cent, whereas the OECD average is 24 per cent, and a lot of our competitor countries are a lot lower than that.
Overall, a reduction in the corporate tax rate can actually result in an increase in economic activity, which then leads to increased taxes overall and increased employment, so it's an interesting phenomenon.
7. How much of a difference will a proposed reduction of the corporate tax rate by 1.5 per cent make?
Given the gap between the Australian corporate tax rate and the OECD average, a 6 per cent reduction may be more appropriate.
The Henry review discussed bringing it down to 25 per cent, which certainly brings it a lot closer to the OECD average. A reduction of 1.5 per cent is a mere tinkering around the edges. The effectiveness of the 1.5 per cent rate reduction will be reduced by the Federal Government’s recent announcement that indicates that this proposed corporate rate reduction will only be effective for small companies. The exact details of this announced change to the rate reduction are not yet available but it appears that the benefit of the announcement that the paid parental leave levy will not proceed, may be lost as the company tax rate reduction may only apply to small business.
8. Is the superannuation scheme in need of reform as well? If so, how?
Superannuation is one of the most complex areas of tax, and probably the main area that needs reform. Our scheme is quite different to most other countries' arrangements around taxing retirement incomes. Many other countries have no tax on the way in, and then a reduced tax on the way out - which is a system we used to have but changed a few years ago.
The complexity of the system definitely has to be reviewed - Australia is out of line with other countries with regards to how they tax superannuation.
9. How can the fringe benefits tax system be reformed?
The system at the moment is quite complex - the employer pays tax on the benefits it provides to employees. Most other countries have a system where it's the employee who pays the tax on the fringe benefits, and they have a fairly simplified system in relation to calculating those benefits and the tax payable on them.
Our system is far too complex, particularly for the amount of tax it actually collects. In the interests of fairness, we should rather be taxing the people actually getting the benefits - the employees.
View this year's edition of the BDO Tax Reform Survey.