What the Tax?

By Kristopher Meuwissen

What the Tax? is a short article examining and deciphering solutions for tax reform in Australia.

The need for tax reform

Australians don’t mind paying tax. They just don’t want to pay more than they have to. We all agree that paying tax affords us a great healthcare system, welfare for those who need it and other crucial services but over the last 20 odd years we seem to have created a tax system of the ‘haves and have nots’.

So many people I meet are so concerned with reducing their tax they are willing to go into hundreds of thousands of dollars’ worth of debt just to save a few thousand dollars.

What I am talking about is negative gearing and most people are so excited that the strategy might save them $5,000 that they overlook the risks involved.

A friend shared an article with me written by Michael Pascoe from the New Daily. The subject of the article was around how the government-mandated increase in minimum wages was more of a boost to the government than to workers. As I was reading the article there was something that smacked me in the face like a ton of bricks.

Our tax system is too complicated and has major gaps.

Previous attempts at reform

Every government has tried to make their mark with tax, adding things here, giving breaks there but we haven’t really had serious tax reform in this country since Howard’s 1998 “referendum on the GST” election win, which saw the introduction of the GST as well as a change in the personal and corporate tax rates.

Successive governments have since tacked on and removed tax after tax to a point that now the tax system is so overloaded and complicated that the average person would need a degree in taxation and accounting to work out if they would be better or worse off by working an extra shift each week.

With such an over-complication, people are claiming things they shouldn’t and actively looking to minimise (and sometimes avoid) their tax by trying to take advantage of precarious tax loopholes and getting paid in cash or other potentially illegal things. Most of the time they don’t even know they are doing the wrong thing or don’t understand the consequences.

We need to make our tax system simpler and fairer.

The current model

According to an article from PWC (Price Waterhouse Coopers), Australia has a whopping 58.8% reliance on income and corporate tax revenue, which is the second highest in the OECD. What this means is that there is a huge amount of potential room for a shift away from high personal and corporate tax rates. Also mentioned in the article is that Australia only derives 12.2% of tax revenue from consumption taxes such as the GST.

An interesting point to also note, is that the Henry Tax Review, published in 2010, identified consumption taxes as the most ‘efficient’ form of taxes. It also cited in an OECD report which found that a 1% switch away from income taxes to consumption taxes (eg land tax) would improve long-run economic growth per capita by 2.5%.

What can we do?

By moving away from high corporate and personal tax rates and generating more tax revenue from consumption, we will be able to make a fairer and less complicated tax system.

This model provides two major things to individuals and businesses. More money in their pockets that they can go out and spend (or keep as cash reserves) and more confidence that they are doing the right thing as well as paying their fair share.

While we’re at it, why don’t we make superannuation more attractive to lower income earners so there is more incentive for young people to prepare for their retirement? But that is an entire topic in itself, and one I will address another time.

We need to reduce the ridiculous number of loopholes, deductions and speculation, and replace it with a simpler, streamlined, progressive tax system with a greater reliance on consumption tax revenue.

This cannot be achieved without a long-overdue bipartisan plan for future tax reform – something that both sides of politics can move forward with regardless of who is in government. Otherwise the next 20 years will look much like the last 20 years, with higher regulation, compliance costs and tax avoidance.

Have some questions? Want to know how it applies to you? Want a review of your personal situation? Click here to book a Free 15 Minute Discovery Session, give us a call on 1800 577 336, or email us at hello@wealtheon.com.au.

Disclaimer

Kristopher Meuwissen is an Authorised Representative No: 466483 of Lifespan Financial Planning Pty Ltd AFSL: 229892. The purpose of this document is to provide general information only and the contents of this document do not purport to provide personal financial advice. Wealtheon strongly recommends that investors consult a financial adviser prior to making any investment decision. The contents of this document does not take into account the investment objectives, financial situation or particular needs of any person and should not be used as the basis for making any financial or other decisions. The information is selective and may not be complete or accurate for your particular purposes and should not be construed as a recommendation to invest in any particular product, investment or security. Lifespan and its Authorised Representatives do not accept any liability for any errors or omissions of information. The information provided on this document is given in good faith and is believed to be accurate at the time of compilation.