The Tax Forum: 10 ways to build a better tax system

The supposedly dry world of tax has been at the centre of two of the biggest political bunfights in as many years: the carbon tax and the mining tax. Throw in the controversy over the Government largely ignoring a lengthy review of the system led by former Treasury head Ken Henry and it’s clear bean-counting can be a taxing topic for our political leaders.

When the Government about six months ago announced a tax forum would be held in October, it might not have expected the discussion on tax to get even more heated – but it has.

Labor has promised the summit, to be held on October 4 and 5 in Canberra, will cover personal, business, state, environmental and social, governance and transfer payments system.

But there has already been controversy around the short length of the forum, who is invited, who hasn’t got a call up and whether the Government really intends to act on any of the suggestions raised.

Only one thing is for sure: hundreds of guests from industry and business groups, unions, community groups, academia, unions, and state and federal Governments will use the forum to push their own pet ideas on how best simplify and improve the tax system.

To help you get ready, SmartCompany has spoken to experts and attendees to find 10 ideas on how we can improve the tax system.

Make changes to the GST

Far and away the biggest ‘it’ subject in taxation is a broadening of the goods and services tax, despite (of perhaps because of) Federal Treasurer Wayne Swan insisting no change is likely any time soon. Independent MP Tony Windsor, the International Monetary Fund, the Organisation of Economic Cooperation and the Business Council of Australia have each raised the prospect of changes to the 10% level.

As Housing Industry Association chief economist Harley Dale says: “It’s very hard to talk about tax reform in Australia when what could be the most effective tax isn’t on table.”

Niv Tadmore, Clayton Utz partner, agrees that the GST needs to be on the agenda, but the issue is a known political hot potato.

The calls to change the GST are underpinned by a few things:

• The GST’s current lack of consistency, in that it does not apply to all goods and services such as fresh food, education and health services.
• That an increase could help abolish some hated state taxes, such as insurance taxes, motor vehicle taxes, commercial conveyancing duty and payroll taxes.
• Concerns that states are overly reliant on revenue from the property market, which is largely stagnant across the country.
• The current rate is below levels set overseas.

CPA Australia business and investment policy head Paul Drum draws inspiration from a study commissioned by his group and carried out by KPMG Econtech, which this month found that broadening the 10% GST to include health services, fresh food and education, or increasing the rate to 12.5%, 15% or 20% would “lead to an overall standard of living.”

“This is because the costs of imposing the GST are smaller than the benefits of abolishing the inefficient taxes,” the report says.

The report adds that leftover revenue from any increase could be used to fund reductions in company tax and personal income tax and address equity concerns – that is, transfer payments to households for compensate for the increased costs for goods and services.

Failing a thorough tax forum discussion, CPA Australia’s Paul Drum says a good outcome would be the Federal Government putting the prospect of an increase on the agenda of its next meeting with the states.

Compensate SMEs for doing the work of Government

One of the more unconventional ideas is being floated by the Council of Small Business of Australia. Peter Strong, COSBOA executive director, proposes small business be allowed to keep up to 10% of all tax-related collections up to $1000.

“We want compensation for any extra time we have to spend doing the work of Government,” Strong says.

He also says the Government should also foot the bill for any upgrades small businesses need to implement new Government policy.

“When the tax rate is changed, we have to spend money upgrading our software,” Strong says.

“We have proposed that the government should provide, via a website, the necessary software patches for the accounting software. Small business can then download that patch free of charge.”

Strong says the Government could negotiate this with the software companies, and this would be relevant for changes in a tax rate or process.

Take small business out of super and paid parental leave payments

Strong has another wish: for small business to be relieved of having to pay super or distribute paid parental leave.

“There is an opportunity to remove business from the collection-process for superannuation, “Strong says.

He also argues that removing small business from paid parental leave obligations would decrease the complexity of the tax system for small business.

Mixing kids and tax

The Henry tax review in December 2009 stated “workforce participation is strongly influenced by incentives in the tax and transfer system, and the affordability of quality childcare.”

While the Labor Government has made some changes in this area over the past few years – boosting childcare rebates to 50% and introducing paid maternity leave – mixing parenthood with paid work is a topic dear to the heart of the Australian Bankers’ Association, which represents the female-heavy world of banking.

Stressing he does not have the tax expertise to offer the right solution, ABA chief executive Steven Münchenberg is calling for some answers on how to keep people, especially women, in paid work while bringing up children.

“There’s not a strong financial imperative to return to the workforce when tax implications are taken into account,” Münchenberg says. “

The financial trade-off of childcare versus stay-at-home means that some staff choose to leave work to look after children.”

Other recommendations from the ABA include removing tax on deposits and exempting interest withholding tax for non-residents with domestic retail deposit accounts.

More safe harbours

Tadmore of Clayton Utz says reforming some tax law design features would reduce complexity and increase efficiency.

“One way of achieving this important objective is by introducing more ‘safe harbours,’” Tadmore says, referring to the protection of taxpayers from some administrative penalties when false or misleading statement are made carelessly and when a document is not lodged in time, in certain circumstances.

“This simplicity principle is under-used and can make a considerable difference,” Tadmore says.

Address the tax-free threshold for online purchases once and for all

While the Australian dollar has cooled recently in line with global volatility, the commitment of retailers to lowering the tax-free threshold for online purchase has not dwindled as they stare down the barrel of growing consumer confidence in online shopping.

Russell Zimmerman, of the Australian Retailers Association, says the debate remains a live one.

“This issue has not gone away, “Zimmerman says.

He is calling on the Government to make good on the Productivity Commission’s recommendation that purchases worth up $1000 should be taxed, if it can be done in an economic manner.

In its recent report, the Commission found the exemption from GST and duty for imports valued below $1000 to be “only a minor contributor to online offshores purchases by consumers”, but the threshold should be reduced for reasons of tax neutrality.

Establish an independent tax advisory body

Because tax is a notoriously difficult and emotive topic, it’s easy for people to get confused by it – or angry, as we saw with the US Republican Party’s dismissal of President Barack Obama’s recent tax plan targeting the wealthy.

The Tax Institute has an idea to cut through the muck and self-interest: the establishment of an independent advisory body on tax. The body, which the Institute says could be called the Tax Reform Commission, is designed to help conduct modelling and provide advice to the Government on implementation of the Henry review. The institute says the body should be drawn from business, the three levels of government and the community.

Clayton Utz’s Niv Tadmore adds that a review of how the Australian Taxation Office conducts its affairs is another good idea. Tadmore says while the ATO is a relatively good revenue authority, a case can be made for more checks and balances.

Revamp super to prepared for the ageing population

Finding out how to cope with Australia’s ageing population is one of the challenges facing Australia. David Knox, Mercer senior partner, has a few ideas.

Knox says while he supports concessional tax treatment for privately funded superannuation, the Government ought to stipulate that part of an individual’s super balance be taken as an income stream. This would provide greater integration between the three pillars – taxpayer-funded means-tested age pension, the super guarantee system and the voluntary super system – and save the Government money over the longer term.

Knox adds that the current concessional caps provide a disincentive for people trying to save.

“The administration of these caps is complex and produces unfair results, as well as undermining confidence in the long-term stability of taxation treatment of superannuation.”

Stimulate housing through fewer taxes

A heavy-hitter weighed into the debate over taxation of the property sector last week when Treasury boss Martin Parkinson called for a scaling back or abolition of real estate duties, arguing they discouraged workers from heading to the places where work can be found.

It’s a point that hits home for the Housing Industry Association, which argues that high taxes on new houses not only distorts the housing market by increasing the attractiveness of existing homes, but reduces labour mobility.

HIA chief economist Harley Dale says taxes on new developments – from the states, through to the GST, stamp duty and local Government charges – are “extremely high”. Dale adds that infrastructure charges are levied on new residential developments in an “inequitable way”, and delays in planning approvals effectively amount to a “tax on housing.”

Dale says improving federal and state relations is a priority, but cautions that without a discussion of the GST, it’s not a complete discussion.

Hurry up on company tax rate cuts

It’s been bitterly noted that Ken Henry’s ‘root and branch’ review of the tax system has been gathering dust since the reign of Kevin Rudd.

While there’s recognition that the Government cannot be expected to make significant progress on all of the report’s 130 recommendations, there’s broad consensus that the company tax rate should fall even further than the Government’s mooted 1% decrease to 29%.

The Greens went further this month in recommending the proceeds of the mining tax be used to help fund a 5% cut in the company tax rate for small business, although the idea has not been echoed elsewhere.

As the Australian Retailers’ Association puts it, there is “no doubt corporate tax rates in Australia are too high, especially compared to international corporate tax rates.”