Tax System Review Discussion Paper

The Treasurer today released ‘Architecture of Australia’s Tax and Transfer System’, a detailed Discussion Paper examining the basics of taxation and transfer principles of virtually every tax and payment in Australia.

The Rudd Labor Government is undertaking a comprehensive review of Australia’s tax system called Australia’s Future Tax System (AFTS) Review.  This ambitious project is led by Dr Ken Henry AC, Secretary to the Treasury and will be completed by the end of 2009.  The purpose 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’.

The Government is particularly focused on building a tax system that is ‘internationally competitive, streamlined, simplified and harmonised’ and that encourages participation by removing complex disincentives.

The review will encompass Australian Government and state taxes, except the rate and base of the GST, and interactions with the transfer system.  It will consider:

  • the balance of taxes on work, investment and consumption and the role for environmental taxes;
  • further enhancements to the tax and transfer system facing individuals, families and retirees;
  • taxation on savings, assets and investments, including the role and structure of company taxation;
  • the taxation on consumption and property and other state taxes;
  • simplifying the tax system, including the interactions between federal, state and local government taxes; and
  • interrelationships between different elements of the tax system, as well as the proposed emission trading system.

AFTS Review Discussion Paper: ‘Architecture of Australia’s Tax and Transfer System’
The Discussion Paper explains that the ‘tax-transfer’ system is significant because the level of taxation and public expenditure, and the level and targeting of transfers, influence the distribution of income and opportunity across Australia.

The paper is predominantly descriptive and does not offer recommendations.  It includes topics relevant to the architecture of the system such as;

  • An economic perspective of the structure of the system.
  • An historical perspective.
  • Some relevant international comparisons.
  • The mix of taxes on work, investment and consumption.
  • The personal tax-transfer system.
  • The taxation on savings and investment
  • Taxation on consumption.
  • State taxation.
  • The complexity of the tax transfer system.
  • Assistance for the Carbon Pollution Reduction Scheme.

The Discussion Paper emphasises that reforms to the current tax-transfer system are necessary in order to better cope with contemporary challenges including the impact of climate change and the Carbon Pollution Reduction Scheme, technological change, rapid globalisation and demographic changes such as the ageing population which will diminish the efficiency of the current system.

Simplification of the tax-transfer system is likely to be a priority for the Review, with the Discussion Paper highlighting 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.   Furthermore, the report explains that the tax-transfer systems operate separately despite being closely interrelated.  They have different bases of assessment between and within the two systems, including the definition of income, the unit of assessment, the period of assessment and the basis of eligibility, making the entire system administratively complex.  The paper considers current levels of complexity and operating and compliance costs to be ‘above the level that is optimal for society as a whole’.

One of the figures that may provide a further clue to the outcomes of the Review relates to corporate tax.  Australia’s corporate tax rate is above the OECD average of 26.6 per cent.  Since 2001, the unweighted average corporate tax rate for OECD countries has decreased by approximately 6 per cent (from 32.5 per cent) driven partly by concerns about global capital mobility and economic efficiency.  There may be strong incentive here for the Government to reduce corporate tax rates to stay in line with these trends.   In a press conference in Melbourne today the Treasurer described international competitiveness as ‘critical’ but would not discuss outcomes in detail.

It is clear that the Rudd Labor Government considers that the time is ripe for reforming and modernising Australia’s tax-transfer system, particularly given the context of Australia’s strong economic position due to the resources boom that will provide a strong foundation to support change.

The Tax Review Panel will outline its plan for public consultation (which will include submissions) by the end of the month.  Information will be available from .

The Architecture of Australia’s Tax and Transfer System Discussion Paper is available here.

The Media Release from the Treasurer is available here.

The Treasurer’s Joint Press Conference with Dr Ken Henry is available here.