Australia’s Tax System Must Be Put under ‘Permanent Watch’

The Business Council today called for Australia’s tax system to be put under ‘permanent watch’ to make sure it remains internationally competitive.

In a paper on tax reform released today, the BCA said it continued to be concerned with the absence of a strategic reform agenda for tax, given the importance of a competitive tax system to Australia’s ongoing prosperity.

It called for the current review of Australia’s tax system not to be a one-off, and avoid focusing exclusively on whether current tax rates are competitive today, but how these rates match up with current global trends.

“Given the fast-moving nature of global tax reform, a competitive tax rate now may become uncompetitive within a short space of time,” BCA President, Mr Michael Chaney said.

“That’s why tax reform must be a permanent item on the reform agenda.”

“Australia should not aim to play catch-up through periodic, short-term changes to rates and thresholds, but should anticipate global trends in tax reform through a considered, forward-looking plan of reform.”

In its paper, which has been forwarded to the international benchmarking review established by the federal Treasurer, the BCA also urged the review not to simply focus on OECD comparisons, given Australia’s trading and export environment encompassed and competed with many non-OCED economies.

The paper argues that the tax system should be subject to comprehensive and open review at least every two years, similar to regular tax review processes now in place in countries like New Zealand.

Mr Chaney said the paper, Keeping a Permanent Watch on Australia’s Tax System, argued that any strategic tax reform agenda for Australia needs to factor in five key principles:

  • Competitiveness – of both personal and business taxes to attract and retain labour and capital.
  • Adequacy – so that the system provides for spending needs, but not at the expense of damaging future growth prospects.
  • Simplicity and transparency – so the system is easily understood and provides taxpayers with certainty.
  • Engagement – encouraging people to engage in economic activity and pay their taxes accordingly.
  • Efficiency and effectiveness – making sure tax structures are as cost-effective as possible over time.

In each of the areas, Australia’s system has major drawbacks that need to be addressed as part of a managed program of tax reform. These drawbacks include:

  • The large gap – compared to other economies – between Australia’s personal and corporate tax rates, which encourages high-income taxpayers to aggressively minimise their tax liabilities.
  • The high cost of tax administration and the rapidly growing complexity of the tax system.
  • Australia’s corporate tax burden, which is one of the highest among its key competitors.
  • The high rate of personal income taxation which counts against Australia in attracting and retaining skilled workers from overseas and luring home Australians who have left to work overseas.

The paper acknowledges that tax reform is not easy, but warns that putting off changes that are needed now will make inevitable reform decisions harder and more difficult to implement in the future.

It also highlights that proper debate on tax reform also requires an assessment of spending needs in the future – a process that was started with the federal government’s Intergenerational Report in 2002.

“Australia needs a more vigorous debate on spending priorities and strategies for the future,” Mr Chaney said.

“Business and individual taxpayers will not passively accept projections of ever-expanding spending needs and therefore, ever-increasing tax burdens.”

Keeping a Permanent Watch on Australia’s Tax System