There are a lot of things wrong with the Australian tax system. Weaknesses commonly identified include the imbalance in taxing powers between the Commonwealth and the States, excessive reliance on high marginal rates of income tax, a less than comprehensive income tax base, and the existence of a range of economically bad taxes (e.g. payroll tax, stamp duties, insurance taxes).
In the current tax debate most of these issues are not even being discussed, and the PM not long ago ruled out changes to the GST, if the Government gets re-elected. [GST exclusions alone are estimated by Treasury to cost around $21 billion annually. The GST itself raised $56 billion in 2014-15 suggesting the proposed 5 percentage point hike (that few wanted and is now dropped) would by itself have raised nearly $30 billion.]
All that remains is that the left side of politics (Labor/Greens) wants tax changes that reduce the scope for tax avoidance (by targeting tax concessions for superannuation, negative gearing and capital gains tax) by middle and high income earners (seen mainly as Liberal Party voters). While the Government still says it wants to reduce current high marginal income tax rates, the reality is that there is no money to fund any substantive tax cuts (because the Budget deficit is already expected to come in at an unsustainable $37 billion this year).
The Government does concede a need to address some tax loopholes, particularly superannuation tax shelters for high income earners, and (maybe) negative gearing on property investment. It seems much less likely to address "concessional" taxation rates for capital gains. Overall, any tax reform changes by the current Government seem certain to be modest.
The principle Labor is invoking to justify its tax proposals is one of taxing people based (at least in part) on their ability to pay, implying a belief that all forms of income should be captured within the tax net. In this context it is worth canvassing the forms of income exempted from the tax net in order to see whether Labor's proposals truly address this issue.
The biggest exclusions from the tax net lie not in the areas identified by Labor. Instead the two biggest exclusions are (1) the tax exempt status of the imputed rent associated with owner-occupied housing, and (2) the exemption of owner-occupied housing from capital gains taxes. While the removal of these particular loopholes (which exist in most countries) would be extremely difficult in political terms (and I am not necessarily supporting such policies), the fact is they represent truly huge tax shelters in monetary terms, they distort investment decisions by individuals, and they mainly benefit middle and high wealth individuals.
In 2003 the Australian Housing and Urban Research Institute found that the tax concession of not taxing capital gains on owner-occupied housing was $13 billion in 2001, while the tax concession to owner-occupiers of not taxing imputed rent was estimated to be $8 billion annually. Up-to-date figures would probably be several times these estimates in any translation to today's values. Treasury has estimated that capital gains tax exemptions on the family home alone will cost the Budget well over $50 billion in 2015-16
We can conclude that Labor and the Greens are not truly serious about dealing comprehensively with all tax shelters for the better-off. To be fair, the "sacred cow" of tax -exempt returns from the family home is accepted by both sides of politics.
Let's now turn to tax concessions for negative gearing, capital gains, and superannuation
Shadow Treasurer, Labor's Chris Bowen, reckons that "by the end of the decade, our changes to negative gearing and capital gains will deliver an annual $7 billion boon to the Budget bottom line, which will continue to grow until full maturity". A Labor government would confine negative gearing to new housing from July 2017. Current investments and any made before that date would be grandfathered. Labor would also halve the capital gains discount for assets bought after July 1, 2017 – reducing the capital gains tax discount from the present 50 per cent to 25 per cent.
The problem with these proposals and their alleged revenue potential, is that they ignore the business model that drives negative gearing and capital gains.
For negative gearing to pay off, the prerequisite is a significant rate of asset price inflation. If asset prices are not going up, there is little in the way of capital gains to be taxed. Besides capital gains tax, real estate investment, in particular, is already subject to a range of taxes, including stamp duties, council rates, and land taxes. In addition, substantial other transaction costs (e.g. legal and agents fees) are involved, and the banks now levy interest rate surcharges on investors. Pretty well the first eight per cent or so of any capital gain on property investments now goes in stamp duties and transaction costs.
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