It’s wonderful to be here in Melbourne, in my hometown, in my new job as Minister for Small Business and Assistant Treasurer.
The Tax Institute is a leader in tax education in our country, so I’m really delighted to be with you for the close of your Victorian forum. I’m very confident that you’ve had a stimulating couple of days.
This afternoon’s topic is highly germane: indeed it’s the subject on many people’s lips these days, not just tax professionals and Government ministers. There is a broad appetite across the Australian community for genuine tax reform. The Tax White Paper process has made that very clear.
We launched the initial discussion paper back in March and we have received over 860 submissions.
This process has made clear that there is wide recognition that our tax system could serve us better, particularly as our economy and our society continues to experience rapid change.
I want to use the time that I have with you this afternoon to traverse the tax landscape as it currently looks, then go through some of the major reforms we’ve already embarked upon, and look ahead to what the future holds.
But, before we get into the detail I want to outline the basic tax reform principles that are guiding the Government.
We are pursuing tax reform to make our tax system more competitive and efficient and to reduce its complexity.
Our tax reform will not increase the overall taxation burden. We will oppose proposals that seek to increase the overall tax burden and have the effect of reducing our competitiveness and attractiveness as a place to do business. Instead, we seek to create more opportunities for businesses to grow their income and increase Australia’s GDP. We also seek to create more incentives for individuals to work, save and invest.
Tax reform is only worth pursuing if it increases our overall competitiveness, increases our incentive to work, increases investment, increases our national wealth and provides more opportunities for business to create jobs.
A well balanced tax system will collect the revenue we need to fund critical social services and infrastructure, without creating an unnecessary drag on our national economy.
Australia’s tax landscape
Right now, our tax system is weighted towards taxes that carry higher risks and higher costs. It has a heavy reliance on particular taxes, and on particular taxpayers. It’s complex and burdensome, especially for small business. It hasn’t kept pace with changes in the economy. And is holding back Australia’s economic potential.
Let me unpack that.
Our largest source of revenue by far is income tax. Looking at our tax structure, we rely on revenue from income tax more than any other OECD country apart from Denmark.
Personal income taxes raise around $170 billion per year, or around 11 per cent of GDP. It’s close to 40 per cent of the total tax take, and when you add in corporate taxes, it goes up to around 60 per cent. Across the OECD, income taxes as a share of the tax take average around 34 per cent.
Almost half of the personal income tax revenue - 44.7 per cent - comes from the top 10 per cent of taxpayers. Twenty-six per cent of all personal income tax comes from the top three per cent of taxpayers.
Revenue from company tax is close to $70 billion annually, and the top 10 companies pay over 30 per cent of company tax. The top 100 pay around 50 per cent.
This over-reliance on a small group of taxpayers presents a risk to revenue, particularly if large corporates decide to move offshore.
Australia’s company tax rate is either 28.5 if you’re a small business, or 30 per cent if you’re a larger business.
By way of comparison, companies operating in our neighbourhood, Singapore, pay 17 per cent tax. In its latest budget, the UK Government committed to reducing company tax from 20 to 18 per cent by 2020. Other economies are likely to follow.
In fact, the trend across the globe over the last decade and a half has been a shrinking company tax rate. Over this same period, Australia’s general rate has remained at 30 per cent. In a globalised world, Australia’s tax system needs to be nimble and competitive enough to encourage Australian businesses to grow, while attracting more investment - investment in new ideas and technologies. We are in a competitive world for the best talent and ideas.
The bottom line is that a lower company tax burden would reduce the tax system’s drag on the economy, expand economic activity and raise living standards for Australians.
Another consideration is how high our top rate is. In Australia, the highest marginal tax rate is 47 cents for each extra dollar earned. By contrast, New Zealand’s is only 33 cents; Singapore’s is 20 cents.
And our top rate kicks in relatively quickly compared with other OECD nations, at $180,000. That is only 2.3 times the average full-time wage. In the UK the top rate is 4.2 times the average wage, and the US it is 8.2 times.
High personal income tax rates are potentially an incentive for Australians to live and work overseas. We know that people work overseas for a number of reasons: to broaden their experiences and networks, and to pursue new work and financial opportunities. As people are more globally mobile than ever before, it is logical that people will work wherever the reward is greatest. While our tax policies alone won’t determine how much of the talent pool is attracted to come to or remain in Australia, our tax rates should not be a disincentive.
On other taxes, such as the GST, there is definitely scope for improvement. We’ve already announced steps to improve the integrity of the GST with the Government ensuring the GST applies to imported digital products and services. In addition, we have in-principle agreement of the states and territories to apply the GST to imported goods worth less than $1,000. There is room for dialogue with the states on other changes.
While the Commonwealth is reviewing a range of tax reform options the states can be doing more to increase the efficiency of their taxes. Particularly those taxes that are also very volatile and have an unreliable revenue stream.
Another area of tax reform the Commonwealth is working on is reducing the complexity and cost for people interacting with the tax system. Tax professionals know better than most the incredible complexity built into our tax system and the challenges for business in dealing with their tax obligations. And we know that many small businesses are spending too much time and energy and money on compliance when they could be putting those efforts back into their businesses.
We’re very conscious of the need to ease the burden of tax compliance on the shoulders of small business. That brings me to talk about what we’ve already done to help.
What we’ve delivered
For one thing, we’ve brought small business in from the cold. They are front and centre of our economic agenda, which is a very welcome change for Australia’s more than 2 million small businesses.
We’ve already made inroads in reducing the compliance burden and cutting taxes for small business.
We’ve made administrative improvements that will see tax system compliance costs reduced by over $390 million each year.1
New tools - like pre-filling, online returns and apps - are also simplifying the process, but we could do more. In New Zealand, for example, many taxpayers now don’t need to file tax returns at all. In Denmark, taxpayers are not obliged to respond to a pre-filled return - a ‘no response’ is deemed to be acceptance of the return.
Our $5.5 billion Growing Jobs and Small Business package in this year’s Budget lowered tax rates for all small businesses, with a 1.5 percentage point cut to the company tax rate for small companies and a 5 per cent tax discount for unincorporated entities - which comprise about 70 per cent of all small business.
Small businesses can immediately deduct every eligible asset costing less than $20,000 purchased between Budget night and the end of June 2017.
And all small business can immediately deduct certain professional expenses and government payments involved in starting a business, instead of writing them off over five years.
We’ve made changes to the taxation of employee share schemes to make the tax and administrative arrangements more competitive by international standards. That will help innovative Australian firms attract and retain high-quality employees in the international labour market. The Government remains committed to removing blockages, whether tax or regulatory, to agile, innovative start-ups.
We’re making progress on the over 90 announced but not yet enacted tax measures we inherited when we came to office two years ago. Some of these measures dated back more than a decade.
The Government decided not to proceed with 56 of them. Parliament has legislated 25 measures, six will be introduced by the end of the year and the remainder will be dealt with in 2016.
The new system we’re introducing for managed investment trusts will modernise tax rules for MITs, making Australian managed funds more competitive and our expertise more exportable.
We have clarified the tax treatment of foreign investment into Australian assets and through Australian fund managers, through the Investment Manager Regime reforms that passed through Parliament in June this year.
Another area of progress is the Asia Region Funds Passport, which Australia has led, and which will help Australian fund managers offer their world-class services across the region.
Australia has also led the role in developing the G20-OECD Base Erosion and Profit Shifting initiative, particularly as G20 president last year. As you know, the BEPS project is about steps to prevent multi-nationals from avoiding their tax obligations and thus eroding the tax base of the countries they operate in.
The OECD has just released the final package of reforms. This involved two years of work by representatives of 60 countries.
Widespread implementation of the BEPS reforms is required to send a clear message of the G20’s resolve and act as a strong deterrent against BEPS practices in the future.
The Government is already actioning key OECD/G20 BEPS recommendations:
- we have legislation before Parliament to implement the OECD’s Country-by-Country reporting recommendation so that tax officials around the world have a better view of multinational activities;
- we’ve also asked the Board of Taxation to consult on the OECD’s recommendations to combat hybrid mismatches, that is, mismatches designed to exploit differences in the tax treatment of entities or financial instruments by two or more countries to avoid tax;
- we are pursuing anti-abuse rules in our bilateral tax treaties to prevent treaty abuse; and
- the ATO has commenced exchange of information with foreign tax administrations on tax deals provided to multinationals by other countries that may contribute to tax avoidance in Australia.
- We’ll look closely at the final BEPS recommendations and consider what further steps need to be taken to strengthen Australia’s laws.
Importantly, we are also in the process of strengthening the integrity rules that apply to multinationals. The multinational anti avoidance legislation currently before the Parliament will encourage large corporate groups to book their revenue in Australia when they have significant sales activity here. The legislation also doubles the penalties that the ATO can apply to large multinationals that enter into avoidance and profit shifting schemes.
What the future holds
While the Government is making progress there is no finishing line in tax reform and much more remains to be done by the Turnbull Government.
To come back to where I started, we need to look closely at our high dependence on income tax, and our high rates of income tax.
Lowering personal income tax would be a big step forward. It would increase the reward for effort, and remove disincentives for people to work harder and earn more, or to get better qualifications. It would also encourage budding entrepreneurs to make something of their ideas.
State taxes have to be part of the story. We need to look at the efficiency of all taxes, and the interaction between different elements of the tax and transfer system.
Across the whole system there is scope for reform. The Government started a national conversation on this very topic. We’re committed to seeing that conversation through to proposals and policies that embody genuine reforms.
We’re committed to having a tax system that positions Australia well for the future, and that is both fair and sustainable. To us, being fair means that it would reward risk taking, effort and investment. That it would facilitate money going to where it’s needed in the economy, rather than just round and round.
Reforming our tax system will put money where it can do most good: in the hands of talented and hardworking Australians.
We want Australia to be the best place to have an idea and start a business, the best place for talented people to live and work.
That’s why we’re working towards genuine tax reforms that make a difference to Australians, and make Australia the very best it can be.
1 Australian Government, The Treasury, Treasury Portfolio Annual Report on Deregulation 2014 (2015).