Henry Tax Review Update

On 13th May 2008 the Treasurer announced a comprehensive review of Australia’s taxation system – Australia’s Future Tax System Review – to be led by Dr Ken Henry, the Secretary of the Treasury.

On 23rd December 2009, the Treasurer received the final report from the Review team.
The Government is expected to release the report prior to the May 2010 Budget, along with its initial response to the recommendations.
“And then we will publish that, along with the report and we can have a very substantial and long conversation about the implications for public policy right across the board. The government will do that in some months’ time, and we will have a full debate.”
 – Treasurer Wayne Swan, 2 February 2010
Background
The purpose of the Review is to provide a medium to long term framework for reform of Australia’s taxation system. It encompasses Commonwealth and State government taxes, except the rate and base of the Goods and Service Tax (GST), and interactions with the transfer system (the welfare system).
The Review was announced in early 2008, when Australia’s economy was in a strong position due to the resources boom, within a context conducive to reform.
This changed, however, during late 2008 and early 2009, with the onset of the Global Financial Crisis and its effects on the Australian economy and the Government’s budget position. Mr Ken Henry relieved concerns about the effect of the global financial crisis on the Tax Review, saying it was a temporary, short-term macroeconomic shock that would pass, and that the purpose of the Review was to ‘look beyond the immediate downturn and to redesign [the] tax transfer system.’[1]
The review of the taxation system is now likely to be released just as Australia’s economic recovery gathers pace (and the Budget is likely return to surplus sooner than forecast). Importantly, the Review is likely to recommend removing complexity by establishing important directions for a more efficient, simple tax system.
The broad aim of the Review is to create a modern tax structure that will ‘position Australia to deal with the demographic, social, economic and environmental challenges of the 21st century and enhance Australia’s economic and social outcomes’[2].   Reforms to the current tax-transfer system are necessary in order to better cope with contemporary challenges such as the impact of climate change, technological change, rapid globalisation and demographic changes such as the ageing population, which will diminish the efficiency of the current tax system. Streamlining and simplifying the taxation system will result in a more efficient and competitive system in the longer term, despite the initial costs of implementing such reform, with significant ongoing economic benefits.
What to expect in the Tax Review
The Treasurer has indicated that he expects the Review to provide a medium to long term framework for reform, a ten to twenty-year plan. However, there may be some short-term reforms recommended, and possibly implemented as part of the May 2010 Budget.
Reducing the total number of taxes will be the main priority for the Review. The discussion paper released in August 2008 – Architecture of Australia’s Tax and Transfer System – showed that 90 per cent of total tax revenue collected by Australian governments in 2006-07, was derived from only 10 of the 125 taxes paid by Australians each year.   Conversely, 10 per cent of tax revenue in 2006-07 was contributed by the remaining 115 taxes.   There has also been speculation that the number of welfare payments may be reduced from over 30 to less than a dozen.
Speculation around other recommendations of the Review includes:
  • Improving administrative complexity and reducing operating and compliance costs.
  • Reducing corporate tax to stay in line with OECD trends.
  • Lowering marginal tax rates for older Australians and effective tax rates for mothers to encourage them to stay at work.
  • Shifting the responsibility for fringe benefits tax compliance from employers to workers.
  • Replacing state royalty taxes on mining projects with a resources rent tax.
  • Selling longevity insurance in exchange for super payouts, and making such insurance compulsory.
  • A Medicare-style disability levy of around 0.4 per cent as a means to provide care to the increasing number of disabled Australians.
  • Balancing tax benefits in relation to superannuation more in favour of lower income earners.
Outcomes of the Review
The Government is not likely to take up all of the recommendations put forward by the Review.  However, it is expected that the Government will implement a range of measures both over the short and longer-term as part of an overall blueprint for reform.
The terms of reference and other information including submissions are available at http://taxreview.treasury.gov.au.

[1] Ken Henry, speech to the Taxation Institute of Australia conference, 13 March 2009, available online at http://taxreview.treasury.gov.au/content/Content.aspx?doc=html/speeches/03.htm.
[2] Australia’s Future Tax System Review, Terms of Reference, available at http://taxreview.treasury.gov.au/content/Content.aspx?doc=html/reference.htm.