Economy enhancing tax reform likely to be put off to another day

Economy enhancing tax reform likely to be put off to another day

Parliament will soon rise for the federal election, but the Treasurer will deliver the Federal Budget on 29 March and the opposition will reply on the Thursday of that week.

Unfortunately, this is likely to be purely performative political theatre. What a pity for our country, as we need to position our tax system to address tax challenges arising from the accelerating digitalisation and globalisation of the economy.

Yet, it is a very remote possibility that we will see any commitment to economy enhancing tax reform from either major party.

Sure, there will be sweeteners to garner voters’ favour, such as an extension of the low-and middle-income tax offset and a continuation of small business tax concessions. These will be badged as a ‘tax cut’ and a demonstration of a commitment to small business.

Both parties’ proposals will likely look to recover some tax through measures targeted at large multinationals and temporary residents – both groups that have limited influence on the upcoming election. ‘Tough on tax avoidance,’ will be the mantra, and more funding will probably be allocated to the Tax Office as a result.

What will likely be ignored again is what Australia really needs – a comprehensive review of the tax system. Tax reform is not just about tax cuts. It requires a rational identification of how all aspects of the tax system interact with each other and with the economy, and makes changes to ensure the necessary amount of tax is collected without overly distorting economic decisions.

Some items that should be on the radar include changes to the capital gains tax regime to ensure that tax does not skew investment decisions. Consideration should also be given to permanent investment allowances which will encourage businesses to invest in income-producing business assets and arrest the effects of long-COVID and international instability on the economy. Further, the confusing two rate company tax system should be simplified to ensure that Australia remains an attractive investment hub for global capital.

Ultimately, expect a budget that is indistinguishable from those of the last decade. Economy enhancing tax reform measures are likely to be put off to another day.