Major parties ‘hellbent on piecemeal tax changes’ as election looms: IPA

The two major parties remain resistant to embarking on comprehensive tax reform despite Australia’s tax system desperately needing a holistic makeover, IPA general manager of technical policy, Tony Greco, says.

Greco said the Division 296 tax is a good example of what is wrong with the way the government is currently approaching tax law changes.

“With the exception of changes for multinationals and the thin cap rules, Division 296 is the only substantial revenue measure that has been proposed by the current government despite all the extra spending commitments made during their first term in office,” Greco said.

Greco said the holistic settings around superannuation were already a convoluted maze of thresholds and complexity and that the new tax for those with $3 million balances would only add another layer to this.

While any government in power has the right to propose changes to the concessional treatment of superannuation savings, Greco stressed that any changes should abide by the three principles of a good tax system – fairness, simplicity and efficiency.

“The only principle adhered to in relation to Division 296 is simplicity. There are many alternatives to bring in the extra revenue that could have been considered without all the unintended consequences which would have facilitated a safer passage through the Senate,” he said.

With the election now fast approaching, Greco said there has been no talk of a “banquet of reform” for tax from either major party.

“Both major political parties are hellbent on continuing to undertake piecemeal nips and tucks that add layers of extra complexity to already congested tax laws,” he said.

Greco described Australia’s tax system as a “dysfunctional” leaking bucket due to its overreliance on personal and company taxes which are a drain on productivity.

“Our revenue mix is out of whack and the overreliance on taxing personal effort is damaging to the economy when compared to other taxes,” he said.

“Treasury and the OECD has been warning successive governments of this problem for decades.”

The IPA said while indirect taxes such as the GST will need to do some of the heavy lifting in reshaping Australia’s tax mix, other indirect taxes also need to be considered. This includes looking at the way that passive income is taxed, for example.

“We fully understand the challenges of trying to implement this in the midst of a cost-of-living crisis,’ said Greco.

“The GST changes will involve some trade-offs such compensating those on fixed incomes, and it needs to be done as a package of measures which would include amongst many other things, lowering personal tax rates.”

Without any changes to the tax system, there will be major implications for the federal budget in future years, he warned.

“Our ageing population will expose future governments to less personal tax revenue as there will be fewer workers supporting a larger proportion of retirees,” he said.

“The shrinking pool of workers will mean the asset poor young will be paying dearly. Less petrol excise will also be recouped as the population transitions to cleaner alternatives. Similarly, taxes from tobacco and alcohol are all trending downwards.”

Greco said the urgency of holistic tax reform is exacerbated by the fact that the government is baking in extra layers of permanent government spending in areas such as the NDIS, aged care, childcare and defence.

Australia’s credit rating and fiscal bay have mainly been kept at bay by bracket creep and favourable terms of trade for major exports.

“Successive governments have a lot to thank bracket creep for. It keeps giving, particularly when we have wage growth in periods of high inflation,” he said.

Greco said the government has not banked any of the mining boom away in a foreign fund “for a rainy day” so the Australian economy and fiscal situation remain vulnerable if commodity prices soften and demand from trading partners were to dwindle.

“In the midst of a trade war, anything is possible, and our privileged position globally could come unstuck as our weaknesses are exposed.”

While Australia waits for tax reform, Greco said structural fiscal imbalances would add to the nation’s existing debt pile which would be a burden on the next generation.

“In addition, it will continue hurting productivity which has been in a slow decline in Australia due to policy inertia on other necessary reforms in many areas of our economy.”