Can tax reform solve Australia's urgent economic issues?

By Gary Anders

Tax reform has been a pressing issue for many years, with various stakeholders – from politicians to economists – advocating for change.

In October 2023, the Paris-based Organisation for Economic Co-operation and Development (OECD) released a detailed report that urges the Australian Government to introduce sweeping changes to how it collects tax revenue.

The OECD has recommended that Australia raise and broaden the goods and services tax (GST), remove retiree tax concessions on pension earnings, replace property stamp duties with land taxes and consider introducing inheritance and estate taxes.

Australia’s 10 per cent GST rate sits well below the OECD’s global average 19.5 per cent consumption tax rate, with the standard GST rate in more than two dozen countries now between 20 and 25 per cent.

“Revenue should be raised through reducing exemptions in the goods and services tax base and consideration should be given to raising the rate.

To offset any regressive effects, compensation to low-income households should be provided,” the OECD report says.

Broaden the tax base

The Intergenerational Report 2023 from the Australian Treasury highlights the need for tax reform. The report notes that structural changes to the economy are projected to increase pressure on Australia’s revenue base over the coming decades.

Treasury predicts that changing consumer preferences, rapid technological advances, global efforts to decarbonise and a more complex global strategic outlook will reshape the economic environment over the next 40 years.

For example, tax receipts from traditional revenue sources such as fuel excise and tobacco excise are expected to decline over time. Global demand for bulk commodities, and, therefore, reliance on them as a source of company tax revenue, is also expected to fall.

Treasury notes that, in the absence of policy changes, its projections show an increasing reliance on personal income tax. However, the report also predicts that the percentage of Australians paying tax will decline as the population base ages.

“Only 12 per cent of Australians aged 70 and over pay income tax, and this age group now makes up 12.2 per cent of the total population. This age group is expected to increase to 18.1 per cent of the total population in 2062–63,” the report says.

In the Federal Budget 2023–24, the Australian Government announced plans to implement key aspects of Pillar Two of the OECD/G20 Two-Pillar Solution to address the tax challenges arising from the digitalisation of the economy.

Pillar Two introduces a global minimum effective tax rate where multinational enterprises with consolidated revenue of €750 million (A$1.24 billion) are subject to a minimum 15 per cent tax on income arising in low-tax jurisdictions.

Another major change to Australia’s tax payment structure will come into effect in July 2024. The amendments made by Labor to Stage 3 tax cuts will change the legislated rates by reducing the 19 per cent tax rate to 16 per cent for taxable incomes between A$18,201 and A$45,000. They will also reduce the threshold to which the 30 per cent tax rate applies from A$200,000 to A$135,000.

The existing 37 per cent rate, which Stage 3 was to abolish, will instead be retained, and will apply to incomes between A$135,000 and A$190,000. The top rate of 45 per cent will remain for incomes above A$190,000, rather than the A$200,000 level envisaged under Stage 3.

 

"Australia’s tax system is complicated. You have two different rates for companies depending on how large you are. As we look at the future with a declining population paying tax, the burden on individuals is becoming increasingly unfair."

 

Individuals who have taxable incomes of less than A$146,486 – which is nearly 90 per cent of all taxpayers – will get either the same or a larger tax cut under the new plan.

The remaining 10 per cent who have higher incomes will get smaller tax cuts than under the original Stage 3. The tax cut for individuals who earn more than A$200,000 a year – less than 5 per cent of taxpayers in 2024–25 – will be halved, from A$9075 to A$4529 a year.

However, while the forthcoming change will lower the income tax burden for many Australians, there is a broader view that tinkering around the edges of the tax system will not address the nation’s major demographic shifts and structural changes.

Elinor Kasapidis, interim chief learning and innovation officer at CPA Australia, says tax reform in Australia has been challenging for decades, “but the reality is that we need to change how and where we generate our tax revenues from for the future sustainability of Australia”.

“The OECD has highlighted that we are far too dependent on income taxes, both for individuals and companies, and we need to see the GST contribute more to the Australian tax base,” Kasapidis says.

“Australia’s tax system is complicated. You have two different rates for companies depending on how large you are. As we look at the future with a declining population paying tax, the burden on individuals is becoming increasingly unfair.

“This year’s changes to the Stage 3 tax cuts do nothing to resolve the fundamental issue – we must see a shift away from income tax as the key revenue source. We want to see reductions in the company tax rate as well as a rebalancing of individual income tax rates.

“This means the GST base needs to be broadened. We need to look at simplifying how we collect GST, and we may also need to look at increasing the rate," Kasapidis says.

“We are not supportive of inheritance or death taxes, and that is because a lot of the time those assets are from post-tax income. We want to see a system where income or assets are taxed at the right time, and we believe that should occur during someone’s lifetime.”

Former Grattan Institute CEO Danielle Wood, who is now chair of the Productivity Commission, says the implication of not taking policy action is that future generations will need to bear the costs.

“Ultimately, there are three levers that governments can pull to address long-term budget challenges – they can make economic reforms to ‘grow the pie’, they can increase taxes, and they can reduce spending,” Wood says.

However, higher growth alone will not be enough to close the budget gap, she adds.

“Given the scale of the challenge, governments will also need to find ways to reduce spending and/or boost revenue. After a decade of looking at this challenge, I have come to the view that we will need to do both.

“The scale of the challenge, and the greater buy-in that can be achieved when the costs are spread across the population, are arguments for looking to both sides of the budget for answers.

“More and more, questions of sustainability and intergenerational fairness are raised about our current tax mix. Expect them to get louder and louder over the coming decade without action.”

Leading independent economist Chris Richardson says government spending should be the “go-to” lever to pull, rather than just focusing on taxes to improve fairness.

“Spending really helps the low end, while taxes relative to income even out for pretty much everybody, they are equally negative,” Richardson says.

“There is a range of things that you can do. We do tend to get a little lost – perhaps particularly the financial press – assuming the things government can do to raise living standards and prosperity, are about tax. They are not.

“Now, some taxes are spectacularly dumb,” Richardson argues. “The most notable one is stamp duty. Every time you raise a dollar in stamp duty, you are shrinking the economy by almost a dollar. Whereas, for example, land tax has a very low efficiency cost.

“If you could get rid of stamp duty in Australia and raise that money through land taxes of various kinds, you would be raising average Australian incomes. In other words, some of the best tax reform measures we can do in Australia are at the state rather than the federal level.”

Spearhead the push

Independent member of parliament Allegra Spender has been spearheading a push to unite academic, business and civil society leaders to build consensus on the need for tax reform and the way forward.

Spender held a series of roundtables on potential tax reforms in 2023, with leading business groups and leaders, economists, unions, social sector organisations and environmental groups in attendance.

“This is being done with an awareness that reform often takes quite a significant amount of time,” Spender says.

“The way I approach tax reform is to look at the why first, to ask, ‘Why do we need it?’. I look at it through a number of lenses. One is around productivity and how tax influences productivity, which is critical to Australia’s economic growth.

 

"When we are worrying about climate, when we are worrying about housing affordability and when we are worrying about productivity, we should be thinking about tax."

 

“I also look at it through other lenses, particularly intergenerational equity and making sure that each generation can continue to thrive and has economic opportunities. That is, how to ensure that we support our transition to low carbon and protect our environment.”

Spender says one job is to explain the important role of the tax system to the broader community.

“When we are worrying about climate, when we are worrying about housing affordability and when we are worrying about productivity, we should be thinking about tax,” she says.

“I think that makes the political will easier, because the more the community is at least open to considering tax reform, the more the politics start to become possible.

“The Intergenerational Report showed us that we cannot just carry on,” Spender says. “We have these demographic shifts happening, and we have structural changes happening. That means that we have to deal with it.”

The Malaysian Government’s 2024 Budget contains a series of reform measures Prime Minister and Finance Minister Anwar Ibrahim describes as “plugging the leakages in the subsidy system”.

They include raising Malaysia’s service tax rate from 6 to 8 per cent on most items, introducing a high-value goods tax at the rate of 5 to 10 per cent, and taxing capital gains on the disposal of unlisted shares at 10 per cent.

In line with the OECD’s Two Pillar Solution, Malaysia will implement the 15 per cent minimum tax for companies with global revenue of at least €750 million (A$1.25 billion) from 2025.

At about 12 per cent of GDP, Malaysia has a low tax base when compared with the 34 per cent average of OECD countries.

Alan Chung FCPA, head of the indirect tax and transfer pricing practices of Grant Thornton Malaysia and chair of CPA Australia’s Malaysian Tax Committee, says GST, if reintroduced, would broaden Malaysia’s tax base to reduce the nation’s fiscal deficit.

“Other tax reforms can also be introduced to reduce inefficiencies and increase the effectiveness of tax collections, which can help reduce the shadow economy.”

Anthony Lau FCPA, partner, international tax services at Deloitte Hong Kong and chair of CPA Australia’s Hong Kong Tax Committee, says Hong Kong is currently mostly focused on enhancing competitiveness, revitalising the economy and introducing industry-specific tax incentives.

“Reducing the tax rates on individuals may not be the current focus, nor a long-term policy of the Hong Kong government, although we have seen one-off measures – such as tax reductions to reduce individuals’ tax burdens – in the past few years,” Lau says.

On the OECD’s Two Pillar reforms, Lau says there would likely be an additional tax burden for multinational enterprises paying less than the minimum 15 per cent global tax rate.

“In view of the Two Pillar reforms, Hong Kong will introduce a qualified domestic minimum top-up tax (QDMT) to protect its taxing right, which may diminish Hong Kong’s competitiveness as a low tax jurisdiction. In view of this, we understand the Hong Kong Government is exploring other ways and policy measures to improve Hong Kong’s competitiveness.”

Hong Kong’s Inland Revenue Department has other tax reforms in its pipeline, including plans to review and enhance the tax concession regimes for funds and carried interest, Lau adds.

“Meanwhile, legislations have been introduced to enhance the existing aircraft leasing preferential tax regime and provide new tax deductions for spectrum utilisation fees for telecommunications network operators.”