As the dust starts to settle, the consensus seems to be that – mining super profits tax or the Minerals Resource Rental tax aside – the Australian federal government didn’t go far enough, fast enough in its initial response to the Henry tax review.  Now the question is: what next?  What’s to be the fate of the 100 odd recommendations the government left hanging? 

At this stage it seems to be a review that is on hold, apart from the super profits tax. 

When you read the Henry review report it’s a co-ordinated set of proposals.  Once you start picking and choosing you take away the integrity of the whole plan. 

Generally the Henry report is very unimpressive and the government’s implementation of the things they’ve done – or half done, seems half baked.  The report purports to make things fairer and it purports to make things simpler, and it achieves neither of those ends. 

In short it is an opportunity missed because of its narrow focus and has expressed concern about the time lags, with many initiatives not to occur until 2012 and beyond. 

The review presented a once-in-a-generation opportunity for comprehensive reform but what we have to date is a package that effectively relies on one, albeit substantial new tax. 

There were 125 taxes in Australia by Ken Henry’s count.  Now there’s 126. 

The final report from Australia’s Future Tax System Review, as it was known officially, comprised 138 recommendations.  The federal government picked up just a few, most notably the resource super profits tax (RSPT), which will be accompanied by a A$5.6 billion infrastructure fund and a resource exploration rebate. 

The government agreed, too, that the company tax rate should fall – but to 28 per cent, not the 25 per cent Henry suggested.  It will also introduce a 50 per cent tax discount on interest income and implement “tick and flick” tax returns for individuals with simple affairs. 

The government rejected outright an additional 21 recommendations, including reform to capital gains tax and negative gearing, leaving the remainder, for all intents and purposes, in the maybe pile.

It then proceeded to make announcements that weren’t based on the report, such as increasing the superannuation guarantee to 12 per cent. 

All of the government’s proposals are tied to the successful passage of the RSPT, a measure the Australian Coalition opposes, and none will be implemented before the election on 21 August 2010. 

Blue skies 

Neil Warren, professor of taxation at the Australian School of Taxation at the University of New South Wales, says the short-termism of politics means governments inevitably “cherry pick”.  “But what this review has given us is clear economics to reflect back on in terms of what should be done – not what could be done or what is done, but what should be done.  “He says.  “It’s a blue-sky piece”. 

Warren foresees a long journey.  “There are some major recommendations in here, some icons that are challenged – the family home, bequest taxation, the role of states – all of those issues need fundamental challenging and I think you’ve got to say these involve 10 to 15 year horizons, accompanied by considerable public education in the meantime.  There are many more things that will trickle out over the coming months and there’s a long way to go on some of these reforms – which means if we get there in a decade we’re probably doing well.” 

Warren also says that when you start looking closely at many of the 100-odd recommendations, some 20 relate to the states.  

“The Henry review recommends major changes to payroll tax, land tax, conveyancing duties, insurance taxes, gambling taxes, royalties…… you name it, they turned over every stone on the state tax front.  That begs the questions:  what is the role of states and what are their responsibilities within the federation?  There’s obviously a lot of talking to do with the states before they move state tax reform along.  That, I think, is three to five years down the track.” 

Commentators have noted it took 25 years for reforms mooted in the Asprey tax review of 1975 to eventuate, including capital gains tax (1985), fringe benefits tax (1986), dividend imputation (1987) and a value-added tax (the GST in 2000). 

“In 25 years’ time we’ll probably have a classical system of company taxation or even a business cash-flow tax, all our tax returns will be automatically filled in, consumption tax (GST) levels will be double the rate they are now”…..Warren says. 

He adds that quarantining the goods and services tax from a root-and-branch tax review was a huge constraint.  Instead of talking about “a broad-based state cash-flow tax applied on a destinations basis” they could have simply proposed increasing the GST – because it’s one and the same at the end of the day, he says. 

How will it play out? 

But that debate is for the future.  For now, accountants, businesses and individuals are focusing on the ramifications of the few changes that have been announced. 

Warren believes it’s good economics to siphon off the super-normal profits being made in the resources sector, to better balance a two speed economy.  “The question is, how much do you extract?  And that’s where the debate is.  You do have to be careful how you set the parameters, and the way the government has set this one has been particularly tough,” he says.  “It’s also potentially an administratively complex tax because, remember, it applies to every mining company, and mining companies are usually full of engineers, not accountants and lawyers.  The compliance issues are going to be pretty significant on a lot of little miners.” 

Other issues 

At the other end of town there are some potential “nasties” lurking in the report for SMEs, despite “a couple of small gimmes”.  Recommendation 10, which suggests a revised regime to prevent the alienation of personal services income, “whether in employee-like or non-employee-like cases is a real issue.” 

“This recommendation was neither accepted nor rejected by the government but I would say that’s going to be muddled in with another government announcement this team or next,” It seems it’s something Treasury has wanted for the past 15 years. 

Then there’s recommendation 12, suggesting a tighter nexus between the deductibility of an expense and its role in producing income.  It’s potentially so broad in its application as to turn anything one might normally have claimed as a deduction into being non-deductible. 

In return, the aspirational 25 per cent turning into 28 per cent company tax really doesn’t do an awful lot for our clients (especially small and family owned businesses who don’t use companies) nor does the immediate tax deduction for assets worth up to A$5,000 (a rise from A$1000). 

As for superannuation, the boost in compulsory contributions to 12 per cent is fine as such but doesn’t help people who spend time out of the workforce, or small business people who can’t spare the cash to superannuate themselves. 

Over the coming years there will be change in the air. The question is, which party will have their hands on the levers?

Timeline

Director, Tony Martin