With the Federal Government’s delayed retirement income review set for completion this week, the stage is being set for a full-blown tax debate.
While the main issues the review has looked at are the tax treatment of superannuation and problems around the aged pension, there is a growing realisation that taxes in general need reform, particularly after the COVID-19 pandemic has hit employment hard and pushed state and federal government budgets deeply into the red.
Indeed, the early payment of up to $20,000 a person of superannuation benefits – a decisive tax change – has been one of the key government planks in battling the economic impact of the pandemic, along with income support measures such as JobKeeper and JobSeeker.
ANU proposal both “courageous” and innovative
Perhaps sensing the atmosphere is ripe for a conversation on taxation, the Tax and Transfer Policy Institute based at the Australian National University has come up with its own radical tax reform package which includes some interesting changes.
Some of the suggested changes are familiar but nonetheless still very politically challenging – the main example of this being to get rid of stamp duty on housing sales and replace them with land taxes on all owner-occupied homes.
That sort of reform might make a lot of economic sense because it evens out volatile tax streams for state governments, spreads the load of stamp duty over time and reduces impediments to move houses.
But this sort of reform may be terribly difficult to sell to cynical voters who simply see a new tax arriving on the previously sacrosanct “family home.’’
As a result, this makes it a “courageous’’ reform to pursue and potentially a politically suicidal one.
New South Wales and Victoria have been looking at replacing stamp duty with land tax and there have also been suggestions around increasing the rate or the tax base of the GST.
Savings to be taxed separately to labour income
Most of the other suggested changes are quite different, with the main suggestion being that savings should be taxed independently and at a lower rate than income.
According to report co-author Professor Robert Breunig, such a dual income tax system would remove some of the existing distortions – many, of which, act as a way of transferring income from the young to the old.
“As review after review has shown, Australia’s current approach to taxing savings is a mess at best and a serious driver of intergenerational inequality at worst,” said Professor Breunig.
“Some savings measures are progressive, taxing higher incomes more heavily and some are regressive.”
“Some favour the old, but are punitive for the young.”
“Our current tax arrangements are inefficient, inequitable and distort the flow of savings across our society and economy. The system is complex and encourages Australians to engage in costly tax planning schemes.”
Under the dual income tax system, labour income taxes would continue to be progressive, with tax rates rising with income levels.
However, savings taxes would be flat and not be influenced by labour income – encouraging savings in a uniform way across age groups.
Reform can happen in stages
“The beauty of a dual income tax system is that we can move there in stages,” said Professor Breunig.
Perhaps forseeing the howls of protest that might greet such a reform package, Professor Breunig said that “strong lobby groups’’ would defend their particular savings arrangements, including “the untouchable nature of owner-occupied housing, dividend imputation or superannuation concessions.”
“Yet, it makes no sense to consider the tax implications of these individual savings options without also taking into account how they shape the competitive landscape, how they influence the choices of individuals and how they contribute to the efficient mobilisation of savings across the economy as a whole.”
Dividends and superannuation pensions to be taxed
Among some of the changes that the dual income tax system would include are:
- Dividends would move from the current imputation system to being taxable at a flat rate, removing any difference between those in the workforce and those who have retired. It would also make the taxation of domestic and international shares more uniform.
- Owner-occupied houses would be included in the assets test for the aged pension.
- There would be substantial changes to superannuation with all contributions made from post-tax income with a potential upfront subsidy, and super taxes for younger people would be lower.
- Superannuation earnings would be taxed in the retirement phase instead of the current system of being tax free for those over the age of 60, with the revenue raised used to reduce overall super taxes.
Changes “seem radical” but are what Australia needs
Professor Breunig admitted that the changes “might seem radical.’’
“But, in reality, the reforms are reasonable and would bring us closer to the optimal tax system Australians deserve and this nation needs.”
Some of the examples of the current savings inequities outlined in the report show that a person earning between $20,000 and $37,000 faces a marginal effective tax rate on their savings of almost 14%.
For someone earning more than $180,000, the tax rate is less than 6%.
Current low superannuation taxes give substantial benefits to higher income earners while bank account interest is taxed in line with a person’s income tax rate.
That means a person aged under 20 and with 45 years of work ahead of them faces a marginal effective tax rate of 36% on their super while someone aged between 55 and 59 enjoys a tax concession on super worth 111% of their savings.
Franked dividends and negative gearing costing more than $23 billion
The ANU report follows the release of tax figures which show the extent of benefits paid out for dividend imputation and negative gearing – two areas of tax that the Labor Opposition pushed to reform which were said to have cost them the last election.
Figures from the Australian Taxation Office for the 2017-18 financial year showed that tax losses due to negatively geared rental properties had climbed to $13.1 billion before the 2019 election.
Total franking credits were worth more than $10 billion.
The ALP had planned to restrict negative gearing, the process by which landlords are able to offset losses on a property against their total income, and to reverse a Howard government move to give taxpayers and superannuation funds cash refunds for excess dividend imputation, or franking, credits.
The ATO data showed there were more than 2.2 million people with rental properties in 2017-18 of which 1.3 million made a loss.
While the total number of people making a loss increased by just 1.6% over 2016-17, the total losses rose to $13.1 billion or by almost 7%.
Most people are negatively gearing a single property but the biggest increase has been among those with three homes or apartments.
Tax experts have projected a big blowout in negative gearing costs this year as landlords absorb rent discounts or non-payments on their properties due to the coronavirus pandemic.