Tax Reform Agenda
At its most basic level, tax reform is the process of changing the way taxes are collected or managed by governments. But this can mean many different things – Australian taxpayers would be familiar with tax reform in the sense of constant tinkering with the tax system to simplify and improve its operation, to lower taxes when it is politically expedient or increase taxes when government needs funding. We’ve had a few attempts at what is often referred to as ‘comprehensive tax reform’ – for example, the Ralph Review, the Henry Review, and the Business Tax Working Group – some with greater success than others, but the time is now ripe to tackle the challenge headfirst.
To wrap up PwC’s coverage of this year’s Federal Budget, we reflect on the tax reform pipeline.
In the lead up to last year’s Federal election, the Coalition promised to kick off the next wave of comprehensive tax reform with the delivery of a White Paper on Tax Reform in its first term in Government, with the aim of taking any recommended changes to the next Federal election (likely to be held in 2016). Against this background, however, the Government currently has a large number of other key tax priorities to deliver in the short term, including repealing the Minerals Resource Rent Tax (MRRT) and the carbon pricing mechanism in the face of a potentially hostile Upper House, and the reduction of the company tax rate to 28.5 per cent and the introduction of a 1.5 per cent levy on certain large corporates to fund the proposed new Paid Parental Leave scheme. The repeal of the MRRT, intended to take effect from 1 July 2014, will also see the loss of a number of related measures including:
- repeal of loss carry back regime with effect from the start of the 2013-14 income year
- removal of small business capital allowances concessions for depreciating assets that are first used and installed ready for use on or after 1 January 2014, and
- rephasing of the increase in superannuation guarantee (to reach 12 per cent by 1 July 2022, as announced in this year’s Federal Budget).
Similarly, the repeal of the carbon pricing mechanism will take with it planned personal tax rate cuts and associated amendments to the low income tax offset, and the equivalent carbon price imposed through the fuel tax credit system, excise and excise equivalent customs duties and synthetic greenhouse gas levies.
Clearing the backlog
The Government undertook to ‘restore integrity in the Australian tax system’ in late 2013 by clearing the backlog of 92 announced but unlegislated tax and superannuation measures left behind by previous governments. During this process, it confirmed that, in addition to the measures touched on in other parts of our Budget analysis (such as amendments to thin capitalisation and tax consolidation regimes), the following measures would proceed:
- introduction of a new tax regime for Managed Investment Trusts (the Government has announced in this Federal Budget that the start date of this regime will be deferred to 1 July 2015)
- amendments to the existing Investment Manager Regime to implement the proposed third and final element of that regime
- amendments to the Taxation of Financial Arrangements (TOFA) tax hedging provision (also noting that Treasury will conduct a broader review of TOFA in the second half of 2014)
- amendments to the loss recoupment rules for companies with multiple share classes
- look through treatment for ’earn-out’ arrangements
- limiting the scope of the integrity provision in the debt/equity rules
- introduce a targeted integrity measure for Offshore Banking Units, and
- GST reverse charge for going concerns.
Of the 92 unenacted measures, the Government also confirmed last year that it would not proceed with 55 of them, and in a welcome move, announced it will provide statutory protection for taxpayers who self-assessed on the basis of an announced measure that will no longer proceed. Measures no longer proceeding include:
- imposing a tax on earnings on superannuation assets supporting pensions
- amendments in relation to the application of the tax consolidations provisions to demergers, and technical amendments regarding collection of tax liabilities from tax consolidated groups
- modernisation of the controlled foreign company (CFC) provisions and introduction of a foreign accumulation fund rule (reform of Australia’s CFC provisions is likely to re-emerge down the track following the work of the Organisation of Economic Cooperation and Development on base erosion and profit shifting), and
- implementation of recommendations from the Board of Taxation’s 2008 report on modifying the tax treatment of off-market share buy backs.
Whilst the Government’s efforts to clear the backlog are commendable, it is in some ways disappointing as some of the measures that are now ‘not proceeding’ represented real technical deficiencies in the law or opportunities to improve the tax system. Additionally, little progress has been made on those measures that are to proceed, despite assurances from Government that the bulk of the legislation should be passed by Parliament during 2014. As this creates ongoing sources of uncertainty for taxpayers, it is vital that the Government honour its commitment to legislate these measures without further delay.
The need for broader tax reform
Amongst all of this “‘tinkering’, the Government remains committed to conducting a ‘white paper’ process in regard to tax reform prior to the next Federal election and to take to the election tax policies to seek a mandate for implementation in the Government’s second term. This process is unlikely to kick off until early 2015, and unfold over the following 18 months. This is likely to include input from other reviews currently underway or scheduled to take place, including:
- the Financial System Inquiry, whose terms of reference included the examination of the taxation of financial arrangements, products or institutions to the extent these impinge on the efficient and effective allocation of capital by the financial system, and to provide observations that could inform the Tax White Paper, and
- the White Paper on Reform of the Federation, which the Government committed to produce within two years of being elected. This could include discussion of the allocation of taxing rights between Federal and State and Territory governments (noting that the recent Commission of Audit suggested that State and Territory governments should have access to the personal income tax system to fund their own priorities) and the distribution of Federal Government revenues (e.g. revenue from the Goods and Services Tax) to the states and territories.
PwC believes there is a clear need for comprehensive tax reform – done the right way. The ‘right way’ means increasing those taxes that have the least effect on investment and employment, and at the same time reducing reliance on taxes that distort incentives to work, invest and transact business. It also means addressing those factors which increase the complexity of the tax system and the cost of compliance. Without comprehensive tax reform, government debt levels as a proportion of GDP will continue to rise to unsustainable levels, and Australian governments risk not being able to meet the key needs of our community and further slide into debt. You can read more about the case for comprehensive tax reform in PwC’s Protecting our Prosperity series, available on PwC’s PROVIDED BY pwc Please contact
- Tom Seymour
- Managing Partner, Tax & Legal
- Tel: +61 (7) 3257 8623