The purpose of a competitive company tax system is to drive investment and productivity, higher wages and job creation.
Business employs over 10 million people and generates 80 per cent of Australia’s economy activity.
New business investment fell in the June quarter, and is now 12.3 per cent of GDP. This is as low as it was coming out of the 1990s recession.
The Australian economy is heavily dependent on foreign investment.
The decision to entrench a two-tier company tax system with a $50 million turnover cliff for small business means, if a company’s revenue goes over the threshold by $1, they are hit with $250,000 in additional tax (if profits are 10 per cent of their turnover).
Australia’s company tax rate has been frozen since 2001 while other countries have moved to make their company tax rates more competitive.
The average company tax rate across the Organisation for Economic Co-operation and Development (OECD) today is 24 per cent while across Asia it is 21 per cent.
The United States slashed its federal company tax rate in 2018 from 35 per cent to 21 per cent.
The United Kingdom has legislated to reduce its rate from 19 per cent to 17 per cent.
France, which has traditionally put high taxes on business, has said it will cut its federal rate from 33 per cent to 25 per cent.
The company tax take reached $86 billion in 2017-18, and is estimated to be over $100 billion by 2021-22.
The company tax base is increasingly reliant on a relatively small number of taxpayers. In 2015-16, the top 10 taxpayers paid one-quarter of all company tax – around $17 billion.
Interest deductibility recognises that companies require finance to invest and grow. Interest is an expense incurred in operating a business and should therefore be deductible.
Dividend imputation removes the double taxation of dividends paid from profits earned and taxed in Australia to Australian resident shareholders, thereby encouraging widespread share ownership and a more efficient allocation of capital.
The net benefits of dividend imputation remain substantial and franking credits are positively valued by companies and shareholders. A reversion to double taxation would still mean relatively high taxation of dividends.
Accelerated depreciation and depreciation of exploration expenditure support investment by improving the cash flows of major capital investments, recognising the long lead times and risks involved in such investments.
The voluntary Tax Transparency Code was developed to encourage large and medium-sized businesses to publicly disclose their tax affairs and highlight how they are paying their fair share of tax.
It enables large businesses to take the lead, to become more transparent and help educate the public about their compliance with Australia’s tax laws.
Commissioner of Taxation Chris Jordan said in 2017 that Australia’s company tax compliance “is around global best practice and many countries aspire to this level of compliance”.
The global tax issues require global solutions. Acting alone or prematurely may lead to unintended consequences such as double taxation, deterring investment, or distorting genuine commercial activity.
A progressive, but competitive tax system and targeted welfare arrangements can boost growth and mitigate against inequality.
Australia has a highly targeted and highly progressive tax and transfer system. For example:
The top 3 per cent of taxpayers account for 30 per cent of personal tax revenue and 18 per cent of taxable income.
The transfer system is highly targeted, with the ratio of benefits received by households in the bottom quintile, relative to the top quintile, the highest in the OECD.
The bottom quintile receives 42 per cent of welfare spending, while the top quintile receives 4 per cent.
Almost 80 per cent of all benefit spending is means-tested, which is high relative to other OECD countries and more than four times the OECD average.
Personal income tax changes need to preserve the progressive nature of the system but encourage and reward aspiration and effort by ensuring workers are not discouraged from entering the workforce, working more hours or working in Australia.
Taxes affect individuals’ decisions about entering the workforce, working overtime, training, buying or selling a house, buying insurance, saving and spending, and whether to work in Australia or overseas.
Doing nothing to improve the tax system does not mean nothing will happen – average personal income tax rates will soar without periodic relief.
Bracket creep increases taxes by stealth through inflation and disproportionately and unfairly hurts lower and middle-income earners.
The top marginal tax rate of 45 per cent in Australia starts at around 2.2 times the average wage today, making us less attractive compared with other OECD countries.
The UK and Germany have similar top rates to Australia, but they cut in at around 4 and 5 times average earnings respectively.
When the $180,000 threshold was introduced in 2008-09, there were 2 per cent of taxpayers in the top tax bracket. Today this figure is 5 per cent and it will reach 6 per cent in 2024-25.
Simplifying personal income tax returns could help reduce Australia’s $40 billion annual tax compliance burden.
Around three-quarters of Australian taxpayers still use a tax agent to complete their tax return.
The Tax Act itself is more than 4,700 pages long.
The Australian Taxation Office calculates the “tax gap’’ between personal income tax collected and what is owed by Australia’s taxpayers was $8.8 billion in 2014-15.
The most common causes of the gap were incorrectly claimed work expenses, incorrect claims for rental property expenses and non-reporting of cash wages.
The ATO estimates the personal income “tax gap’’ is more than three times the estimated loss from large companies, which was $2.5 billion in 2014-15.
Fringe Benefit Tax raised 1 per cent of all Commonwealth tax revenue in 2016-17 but its compliance costs are exponentially greater than other taxes due to multiple methods of valuing fringe benefits and burdensome paperwork.
The National Australia Bank estimates $1,250 of compliance costs for every $1 million of company tax paid, but $50,000 in compliance costs for every $1 million in fringe benefits tax paid.
Superannuation is one pillar of Australia’s three-pillar retirement income system, alongside the age pension and voluntary retirement savings.
But superannuation tax arrangements are also highly complex and have been changed repeatedly, undermining confidence in the system.
The tax system should facilitate superannuation balances large enough to provide for comfortable living standards during retirement, not large-scale wealth accumulation.
More neutral treatment of savings income would promote more efficient savings and investment allocation across different asset classes, as well as reduce compliance costs and inefficient tax planning.
For example, all nominal interest on bank deposits is taxed at personal tax rates while half of nominal capital gains is taxable.
There are good reasons to continue to exempt the family home from capital gains taxation given both the social benefits of home ownership and the enormous practical complexity and compliance costs of introducing taxation for these assets, which would require deductibility of costs.
Abolishing the most inefficient state taxes, such as stamp duty, has the potential to deliver better economic outcomes and less volatile state revenue.
Treasury estimates that for each extra dollar of revenue raised through stamp duties on property, it costs the economy around 72 cents.
Stamp duties increase the cost of buying a house and discourage people and businesses from moving.
Stamp duties can discourage new housing development as the tax is paid twice: once by the developer when the land is acquired and again when the final owner buys the new house.
Insurance taxes discourage people, especially those on lower incomes, from taking out adequate insurance.
Businesses operating across state borders are confronted by a bewildering array of inconsistent payroll tax and stamp duty regimes. These add to their production costs and ultimately, the prices they charge for goods and services.
Payroll taxes are efficient in theory because they are levied on a broad base (wages), which is relatively immobile. However, in practice, around 95 per cent of Australian businesses are exempt from payroll tax.
This equates to not taxing around 45 per cent of the potential tax base.
Payroll tax rates across states vary from 4.75 per cent to 6.85 per cent, with annual tax-free thresholds ranging from $550,000 to $1.85 million.
A broadly applied, well-designed land tax is efficient and has little impact on incentives to invest, work and save.
Currently around 60 per cent of the value of land is exempt from land tax. An effective tax rate of around 0.2 per cent could be applied to all land without exemptions to raise the same amount of tax revenue as today.
In 2013-14, states raised $6.4 billion in land tax on land valued at about $1.7 trillion, but total land values were $4.2 trillion.
Business Council calculations using Deloitte Access Economics’ figures on the impact of stamp duty estimate that replacing property stamp duties with more efficient taxes could increase real consumption by around $6.5 billion to $11 billion per year and increase GDP by around $3.5 billion.
Australia’s system of federal–state financial relations sees the Commonwealth collect over 80 per cent of tax revenues, while the states have responsibility for the delivery of services in the fastest-growing areas of spending such as health and education.
Western Australia’s share of the GST has dropped as low as 30 cents in the dollar under the original distribution formula.