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Canberra promises rethink on '1950s' system

Australian Treasurer Joe Hockey speaks at the House of Representatives in Canberra on Feb. 10. (Getty Images)

MELBOURNE -- The conservative government in Canberra says Australia's entire taxation structure is up for review as it faces the challenge of transforming its "1950s system" into a framework that will be sustainable into the 2050s.

     Treasurer Joe Hockey announced on March 30 that the government, led by Prime Minister Tony Abbott, wants a widespread debate on reform, focused on reducing reliance on income tax and those that discourage economic activity such as the stamp duty, a levy on financial transactions.

     "The problem we face is that our current tax system, which was designed before the 1950s, is ill-suited to the 2050s. If we want to maintain our standard of living, we're going to have to change," Hockey said.

     Australia's tax revenue as a proportion of gross domestic product is below the average for the Organization for Economic Co-operation and Development, the club of developed economies, according to a discussion paper titled "Re:think," published by the government.

     However, Canberra relies more heavily on personal and corporate income tax than any developed country other than Denmark. In contrast, the proportion of revenue raised from taxes on consumption is below the OECD average.

     The discussion paper says that unless the system is changed, Australia's reliance on income taxes will increase, discouraging corporate investment and potentially reducing immigration by higher paid workers. "Changes in the global economy mean that the flow of financial capital and labor is becoming increasingly sensitive to Australia's tax settings," the paper says.

     Against this background, the government notes that Australia's growth over the past decade has been supported by a commodities boom triggered by record demand from China, especially for mining products such as iron ore. "Unprecedented" investment in the resources sector has raised living standards through knock-on effects on the rest of the economy, the report says.

     However, slower growth in Asia and falling commodity prices mean that the mining sector is no longer driving national income growth. "In the absence of improvements in other drivers like labor utilization and national productivity, growth in real incomes is likely to fall to around 1% a year over the next decade, less than half the rate to which Australians are accustomed," the paper warns.

     The tax base is also threatened by significant demographic changes. Government projections suggest that the number of Australians aged 65 and over will more than double by 2055, while the number of people aged 15 to 64 will fall to 2.7 for every older person, from 4.5.

An iron mine in Australia. Iron ore prices have plunged amid the slowing growth of the Chinese economy.

     "This change in our demographic structure will have important implications for the tax base, as well as the ability of future governments to deliver services at the standards expected by the community," the paper says.

     "Re:think" does not make specific recommendations for reform, even though the government is expected to shape policies before the next election, which is due by the end of 2016.

Conversation starter

However, the paper does make clear that one priority will be preventing tax avoidance by companies seeking lower tax regimes overseas -- an issue on which Australia is already working with other members of the Group of 20 largest economies.

     "Companies are often engaged in economic activity offshore and we are seeing significant leakage from multinational corporations, not only searching for places where they may not pay tax but ... other countries are cutting tax rates to try to get them to relocate," Hockey said.

     Michael Walpole, a professor in the school of taxation and business law at the University of New South Wales, said the paper offered only preliminary ideas, but was a good "conversation starter."

     "I think there's fairly widespread recognition that we do need to reform," he said. "Our system is overly complex. It is overly burdensome in terms of compliance by taxpayers. And I think it's out of step in terms of the split between tax on income and tax on consumption."

     Walpole said the paper touched on most of the important "pressure points" in Australia's tax system. "It's highlighting the inadequacy of the GST [Goods and Services consumption tax] that we currently have. It's highlighting the pressure point in terms of the corporate tax rate."

     Despite the problems, however, Walpole said Hockey's suggestion that Australia was operating a 1950s tax system was a slight exaggeration.


   "We have had ongoing reform -- and some of it major -- since the 1980s," he said. "It's gradual, but we actually do have quite a modern tax system compared to other jurisdictions. But that doesn't mean that we don't need reform -- we do."

     The release of the paper fueled speculation that the government planned to increase the GST, which is levied at 10% on a broad range of goods and services. The tax was introduced in 2000 by the conservative government at the time, after a quarter century of acrimonious debate.

     "The fact that we have a GST at all is a bit of a miracle ... [but] some of the politics of it has resulted in a GST that is not [as] quite all-embracing as an ideal consumption tax," Walpole said.

     Hockey played down suggestions that the government would simply increase the GST. "I think you've got to look at the whole tax system," he said.

     Chris Bowen, the opposition Labor Party's tax spokesman, emphatically ruled out a GST increase, but said his party was ready to support reform, including changes to tax concessions related to retirement savings.

     Under the country's superannuation system, workers make compulsory payments into private personal retirement funds throughout their working lives. Although the system is complex, payments from the fund after retirement are generally taxed at lower rates than other income.

     Research published in 2014 by the Australia Institute, a Canberra-based think tank, concluded that the concessionary income tax rate for superannuation payments reduced annual government revenue by tens of billions of dollars.

'Not fit for purpose'

"Where you've got the situation where the vast majority of tax concessions go to people on high incomes who don't need and won't need the age pension regardless of how many tax concessions you give them, that's not a system fit for purpose," Bowen said.

     The country's most prominent minor party, the Australian Greens, also supports tax reform, especially when it comes to ending "superannuation for the wealthy," but says that any changes should benefit the environment and bear more heavily on the better-off.

     "That means ending taxpayer support of polluting fossil fuels; it means actually collecting the tax owed by corporate Australia and multinationals, and it means closing tax loopholes for the richest among us," said Greens leader Christine Milne.

     With the Australian dollar at a five-year low of $0.76, the economy stalling due to falling demand for minerals from China and unemployment at its highest level since 2002, there is growing speculation that the country could be sliding toward recession.

     Hockey is only weeks away from delivering his second federal budget since the Abbott government swept to power in September 2013, defeating a divided Labor Party. Tax reform is not likely to boost Hockey's popularity significantly, but his political future may depend on the budget, due on May 12.

     Abbott's government -- a coalition between the prime minister's Liberal Party and the National Party, a long-time conservative ally -- is still recovering from a political upheaval in February when the prime minister came close to being overthrown in a vote by Liberal MPs.

     After watching his approval rating drop to 24% on the back of controversial decisions such as the award of an Australian knighthood to the husband of Queen Elizabeth II, the country's head of state, Abbott survived a motion to end his leadership by 61 votes to 39.

     Hockey's fate is closely tied to Abbott's and while the next election is still 18 months away, some observers think there could be another internal party challenge to the prime minister and his cabinet.

     The treasurer was criticized for abandoning election promises when he unveiled his first budget last May. In an effort to reduce a forecast budget for the year to June 2015 of A$29.8 billion Hockey slashed funding for education, health and welfare.

     Since then, commodity prices have fallen, further reducing tax revenues, and the federal parliament's upper house has stalled legislation crucial to Hockey's budget plans. The forecast budget deficit was raised to A$40.4 billion in December.

     Hockey's approach in his second budget is likely to be different. "They have already signaled that it is likely to be a dull sort of a budget. But if there are mistakes or repeats of last year where there were measures they couldn't really bring to pass, that may well make things for difficult for Hockey and ... Abbott," said Clive Bean, professor of political science at Queensland University of Technology.

     "So, it's a dangerous time. ... It could end up doing a lot of harm to Hockey's personal political status. ... But if the budget is seen as reasonably sound, it will help at least prolong his reign as treasurer."

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