BDO has long been calling for Australia’s taxation system to be simplified, as has the profession broadly. The mid-tier’s national head of tax, Marcus Leonard, believes there is a strong case to start with re-thinking the administration and application of the “terribly administratively inefficient” fringe benefits tax.
“The fringe benefits tax is always applied at the top marginal rate of tax, so it assumes that everyone pays tax at the top marginal rate. That's not a coherent system. If it's supposed to be taxing things that are paid in substitution to salary or wages, then they should be taxed at the employee's relevant tax rate,” he told Accountants Daily.
The taxation of trusts is also worth of a review, he said, after being subject to a series of changes and quick-fix solutions since the late 1980s.
“The taxation of trusts for income tax purposes is a terrible terrible mess at the moment. The legislation is almost impossible to decipher,” Mr Leonard said.
“The original law for the taxation of trusts worked really well when the rest of the tax law was quite simple… in the day before capital gains tax and in the days before dividend imputation and franking,” he said.
“Roll forward to the second decade of the 21st Century though, and the tax system has become more complex. You have things like, not just capital gains, but capital gains discounting that applies to some entities and not others. You have things like imputation credits and full refundability of imputation credits,” he said.
“Also, it’s not just the tax system, but the economic system as well that is a lot more complex. You have investors who may invest through trusts, holding investments not just in Australian assets, but also in international assets. And so you have a whole lot of complexity coming out of the changes in the economy,” he said.
The consistent tinkering with the rules surrounding the taxation of trusts has been an issue of debate for several years. The series of changes to trusts law led tax lawyer David Hughes, partner in Queensland law firm Small Myers Hughes, to believe that the government ultimately wants to discourage Australians from using trusts.
“It’s like the frog in the boiling water. Each degree that the temperature goes up is not going to necessarily be a major problem in and of itself. But certainly if you were to tell people some 15 years ago this is where we would be today, they’d be gobsmacked, because when I first started practice, trusts were a very standard tool, and now most advisers would say use trusts with caution,” Mr Hughes said in late 2016, after a fresh set of announcements on trusts were released by the ATO.
In good news for accountants, while the law is “struggling under the weight of all those bandaids,” administrative complexities create work for accountants, and Mr Leonard doesn’t see that clients are deterred from accessing trust structures. “But boy it increases their compliance costs,” he added. “And it leads to quite strange and anomalous outcomes in the tax system sometimes.”
Mr Leonard also believes stamp duty is in urgent need of reform, giving a nod to the Henry Review which labelled it the least efficient tax in Australia. What is particularly problematic about stamp duty is that it limits economic activity because of the burden it places on investors, without the funds necessarily boosting state budgets.
“It crushes economic activity,” Mr Leonard said.