Budget 2018: A tax list without the sugar on top

Originally Published in The Australian, May 7 2018.

This week’s Federal Budget is a pre-election budget and they often bring out short term “sugar hit” announcements, creating a surge of enthusiasm among voters and enticing them from one party or the other.

The policies seem good at the time, yet rarely do these quick-win policies produce longer term benefits. Later we’re left with self-regret, as the sugar rush wears off and we realise we’re in the same position.

For Australia to truly ‘win’ an election, the crux of change lies in the government’s ability to make big decisions that will have long lasting positive effects; and the opposition in its reply to propose something genuine and different.

It’s time to pry the lollies from their hands and give out healthy financial alternatives. Here’s some ideas I would love to hear tomorrow.

Let’s abolish personal tax returns for individuals with simple tax affairs

The ATO already has the data that is reported in the returns of most salary and wage earners with small amounts of investment income, so why do we still insist on a return being prepared by the taxpayer and processed by the ATO? It’s just a compliance burden for individuals and the ATO.

If these returns were abolished, it would free up ATO resources that could be used to better administer the tax affairs of larger and more complex taxpayers, with the outcome of greater compliance with tax laws.

Give personal tax cuts to achieve a 27.5 per cent tax rate for most people

Where the tax rates for an individual is no more than the company tax rate, there is little incentive for those individuals to use more complex structures or tax planning strategies — like income splitting — to reduce their tax rate.

Many of the more complex parts of the tax system are designed to deal with these types of behaviours.

Cut the personal tax rate and it will cut compliance costs and reduce the incentive for tax planning.

Tax family trusts the same as companies

The tax system should produce the same tax outcome for the same underlying economic activity; anything else is inefficient, complex and potentially inequitable.

Family trusts are a case in point. Beneficiaries of family trusts are taxed each year on the profits of the trust, regardless of whether the profits are paid to them; whereas a shareholder only pays tax on profits that get paid to them as dividends.

The solution is to apply the same taxation treatment to trusts and companies. Of course that’s easier said than done, but a large issue could be addressed by making this change in relation to family trusts — leave unit trusts, listed trusts and the like for another day.

One option is to tax trusts. Another option is to allow companies (maybe those operating SME businesses) to elect to have ‘flow through’ taxation — much like a Limited Liability Company in the US.

Either way the tax treatment should be aligned as close as possible because any differences (such as those that would arise under the proposal made by the Opposition), will merely replace one set of issues with another.

Find a way to abolish payroll tax

Payroll tax is a perverse tax because it discourages employment. It’s probably the tax most disliked by businesses.

It’s also one of the few taxes that is managed at a state level, so retains the complexity of different rules and different administration in different States.

It may not be for the Federal Government to abolish payroll tax, but it is open for the Federal Government to take the lead in it.

Although politically difficult, changes in the GST rate could be one alternative. Alternatively, maintaining a slightly higher corporate tax rate, with a portion of that revenue automatically distributed to the States to compensate them for abolishing payroll tax, is another possibility.

Reassess the capital gain tax discount

The capital gains tax discount has been a feature of our tax system for nearly 20 years. But is the current approach still the appropriate one?

A capital gain made on an asset held for 364 days is fully taxable. Hold the asset for a few extra days and only half of the gain is taxable.

This significant variance in the taxation of capital gains also drives a behaviour of trying to recharacterise income gains as capital gains.

If the underlying rationale of the concessional taxation treatment of capital gains is to encourage longer term capital investment, maybe it is more appropriate to phase in the benefit of the concession over a longer period. For example, a capital gain made after 12 months may benefit from a 10 per cent discount, with a 50 per cent discount only available after 5 years.

Greg Travers is the national leader of the Tax Services Division at William Buck.

Budget 2018: A tax list without the sugar on top

Greg Travers

Greg is the national leader of the Tax Services Division which provides specialist taxation consulting advice to a wide range of businesses and individuals, with a focus on private business and high wealth family groups.

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