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Tax reform: The case for change

As we emerge from the economic crisis caused by the COVID-19 pandemic, there has never been a better time to focus on holistic tax reform to remove the complexities, inequities and inefficiencies in order to improve our national productivity and prosperity.

Insights Robyn Jacobson, The Tax Institute 06 November 2020
— 7 minute read

Why now?

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Louis XIV’s Comptroller-General of Finances, Jean-Baptiste Colbert, famously declared in the 17th century that “The art of taxation consists in so plucking the goose as to obtain the largest possible amount of feathers with the smallest possible amount of hissing”. This is no less an accurate description of the challenge facing all governments today.

By now, many practitioners will be aware of The Tax Institute’s ambitious tax reform project, The Tax Summit: Project Reform. This article sets out why tax reform is needed and why now is the right time. Successful tax reform will result in the nation’s economic success, bringing increased wealth and prosperity to all.

As we near the end of what has been an extraordinary year, and hopefully relegate this period as being the worst of the COVID-19 pandemic in Australia, no one can deny that 2020 has challenged us in ways we could never have imagined. As we emerge from the economic crisis that resulted from government-enforced lockdowns, we recognise that our paradigms have shifted and the way we do many things will change forever. The long road ahead may be arduous, but it also represents a re-birth of sorts, and presents a fine opportunity to re-evaluate, question and challenge the status quo.

During the height of the pandemic, the tax system rather than the transfer (i.e. social security) system was chosen by the Federal Government as the vehicle through which the lifeblood for businesses was delivered, primarily through the cash flow boost and JobKeeper programs. All non-COVID-19 related measures, those which would not provide any direct stimulus to the economy, were sidelined during 2020. As we head into 2021, we should avert focus from resuming business as usual and continuing with the predictable array of tinkering and minor legislative amendments. We should instead turn our minds to how our tax system could be redesigned to sustain us into the decades ahead.

A good tax system has three hallmarks: simplicity, equity and efficiency. Most would agree that the current settings in our tax system fail to achieve any of these. Our tax system is undeniably in need of reform, and sorely needs some big thinking, political courage and the right design to achieve national productivity and prosperity. There has never been a better time as we rebuild our economy and turn our eyes to the future. There has been too much talk for too long; it’s time to start the process.

Why does tax reform matter?

The tax system is part of the social fabric. It is so intrinsic to our business, personal and social lives, and is so inextricably integrated with business and commercial law, social security, industrial relations law and participation in the economy that it cannot be taken in isolation, nor should it.

There is much uncertainty in the world, and people need to point to something that they can rely on, that supports them, that encourages prosperity rather than stymying it. Few perceive tax as supporting them — people typically focus only on how much tax they pay and how they support the tax system, rather than how the tax system supports them.

For too long, tax changes seem to have bowed to political agendas, vested interests and often those with money to make a lot of noise. For too long, governments have seemingly designed tax policy purely from a political standpoint when an economic or social perspective was needed.

Tax reform needs an altruistic attitude. Just because it’s not a problem for a particular sector doesn’t mean it’s not a problem for the broader community. An inefficient, ineffective system holds all of us back and has widespread indirect consequences. It is an absurd outcome that the tax and transfer system deters female labour force participation. Once income tax, childcare costs and loss of social security benefits are offset against the income earned, many secondary earners in a household are financially worse off in net terms if they return to work; so many choose not to, even if they want to. How does this help our nation’s productivity?

Why should the manner of taxing business income be based on the legal structure through which it is derived? Why are corporate business profits taxed differently to those earnt by a trust, a partnership or a sole trader? More fundamentally, should business profits be taxed differently to personal exertion income or investment income when derived by the same type of taxpayer?

Why can’t the tax treatment of transactions for smaller businesses adopt a cash flow model? This would involve discarding the revenue–capital dichotomy to assess all cash receipts, whether or not of a capital nature, and allowing deductions for all cash outgoings, possibly with an exception for real property.

There is a place for small business tax concessions in our tax system, but I have tallied 25 different concessions, each with their own threshold, eligibility rules and start dates. Designed to support small business taxpayers, the concessions are ridiculously complex. Integrity measures in tax law are necessary to ensure concessional treatment is targeted, but are these rules over-engineered and choking the practical operation of, and access to, the concessions?

Recent amendments to give effect to the commendable full expensing of depreciating assets 2020–21 Budget measure could have been achieved by simply removing the $150,000 asset cap and lifting the aggregated turnover threshold from $500 million to $5 billion. Instead, a whole new subdivision, Subdiv 40-BB of the Income Tax (Transitional Provisions) Act 1997 was inserted, leaving practitioners and businesses to navigate the new rules layered over the top of existing law.

What does genuine tax reform look like?

Successful tax reform requires buy-in from everyone. Buy-in from the Federal Government is obvious, but it also needs a commitment and total buy-in from the Opposition, the minor political parties and independents, State and Territory governments, the regulators, the broader tax profession, the business community and the people.

Past tax reviews and reforms evidence that the system must be constantly maintained to meet the continually changing needs of the economy. The FBT regime was designed in the mid-1980s and has scarcely been modified since. Its antiquated rules struggle to keep up with the shifting behaviours and trends of the 21st century. The recent amendments to treat Uber drivers the same as taxi drivers for FBT purposes aptly illustrates this.

The successful reforms of the Hawke–Keating and Howard–Costello years worked. They had the support of the above stakeholders, there was general consensus that reform was needed, the reforms were broad (while not all-encompassing, they were wide-ranging), and they were well-explained and ‘sold’ to the people as being necessary for the good of the nation.

We don’t want piecemeal reforms and do not favour isolated changes that benefit one part of society to the disadvantage of the rest. Holistic reform points to an overall package of reforms which may have ebbs and flows but which overall supports the country as a whole and improves our prosperity. We need a complete package of measures that boosts businesses and people in more targeted ways, helping them to invest, grow and create more jobs, without increasing complexity.

We need to move away from the idea that the other guy (whether the one down the road or the government) is getting a better deal than me. We need to abandon the mindset of “How can I get around these rules?” or “What’s in it for me?” The system should be designed so that people respect the laws — but this happens only if it’s easier to start or buy a business, it’s easier to do business, it’s easier to hire people, it’s easier to conduct business across state or international borders, it’s easier to understand the tax rules that apply to my investments, it’s easier to complete my tax return.

People need to know they’re getting a good deal so they don’t feel the need to rort the system. If everyone thought the system was fair, everyone would pay every dollar of tax they ought to pay under the law — we would all be paying less tax as a result.

The tax system is not designed to intentionally trip up taxpayers, but the lack of design and rushed (or, on occasions lack of) consultation overlooks practical realities and consequences. How often do we hear of unintended outcomes? I could point to many examples in our tax law. There is a disconnect between what it says and what it does, between the policy intent and its effect.

We need to change the narrative and the way tax is perceived by the government and community. This stems from a mistrust of the other side. There is a general lack of trust between the taxpayer and the ATO, but the same could be said of the taxpayer and government (Federal and State). If we restore faith in the tax system, we restore trust, we improve the transparency, we remove complexities, inequities and inefficiencies, and we ultimately improve our national productivity and prosperity.

How can you get involved?

We want to galvanise support for this ambitious project and rouse the profession to get involved. We don’t expect busy professionals to prioritise this ahead of their practices or do the heavy lifting, but you can support this movement through your professional bodies or by contacting us at The Tax Institute. Join us and be part of The Tax Summit: Project Reform.

As our website explains, The Tax Summit: Project Reform is an ambitious endeavour from The Tax Institute, incorporating a series of events, discussion groups and roundtables, that culminates in a Virtual Summit on 24–25 November. This is not confined to Tax Institute members; everyone is welcome to attend our events or send through their reform ideas. The insights gained from this collaborative program will fuel and shape a case for change that will be submitted to The Treasury on behalf of the profession.

Tax reform is for not the fainthearted and it takes time. This is why we need to start the process mid-electoral cycle in order that the Federal Government can commit to tax reform in 2021 and take a package to the 2022 election. The package would ideally be implemented in the next term of government.

For more on The Tax Institute’s tax reform project, head to The Tax Summit: Project Reform.

Robyn Jacobson, senior advocate, The Tax Institute

Tax reform: The case for change
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