Participate and influence the debate

Transcription

1 30 March 2015 Tax Alert At a glance Treasury discussion paper starts the national conversation on future directions for Australia s tax system Opportunity for business as well as the public to contribute to the shape of the future tax system Provides an opportunity to address the ongoing problems with the tax policy making process in Australia including the possible introduction of an independent body to participate in this process such as a new Tax Reform Commission EY can help with tax policy modelling and drafting submissions due by 1 June 2015 Australia s tax reform process commences: time to re:think Participate and influence the debate On 30 March 2015, the Government released its Re:think tax discussion paper (DP) to start the national conversation on future directions for Australia s tax system. Out of the many pressures that may cause us to re:think tax reform two stand out: the rapidly changing economy and demographic shift. The Government s objective is to achieve a better tax system that delivers taxes that are lower, simpler and fairer. The DP covers both Commonwealth and State taxes and invites community consultation on 66 deliberately open questions covering a very broad spectrum. We have reproduced the questions in Appendix 2. Australia s tax system faces significant structural challenges including a rapidly changing world economy and an aging population. Following lessons learnt from previous reviews, it is clear that community support and a bipartisan approach will be needed in order to re:think the tax system to address these challenges. We believe there needs to be a better way of conducting these conversations to deliver effective tax reform. Since we called for a Tax Reform Commission we have received support for this idea from a number of interested parties. By putting the right processes and institutions in place we can build a tax system that is fair, encourages productivity and meets the revenue requirements of the nation. The Government has noted it is ruling nothing in or out at this stage and is seeking responses from various sections of the community. Responses to the DP will ultimately form the basis of an options (or green) paper scheduled for the second half of 2015, with the final Tax White Paper to be released before the 2016 election. It is therefore critical that interested parties be involved now in order to shape the tax reform discussion. EY can help with submissions and our tax modelling services can model the impact of potential changes.

2 The need for reform The DP argues that two structural pressures underpin the need for reform of Australia s tax system: A rapidly changing world economy which has been transformed by the digital economy. Australia s taxation system was arguably designed in a different era and needs to be modernised to cope with the 2050s. Deregulation and global supply chains bring opportunities, particularly in the Asia-Pacific region, but also pose challenges including making capital more mobile than ever. A changing demographic where the ratio of working age Australians to older Australians is expected to decline dramatically. This will not only put pressure on demand for services but also makes funding of those services more challenging. These challenges highlight a need to re:think : Australia s tax mix, which relies heavily on corporate and personal taxes. Australia currently has the second highest reliance on corporate and personal income tax in the OECD as depicted in Chart 2.3 on page 18 of the DP (reproduced in Appendix 1 of this Tax Alert). Key areas of focus in the DP include the international competitiveness of Australia s tax system, whether the tax system strikes the right balance between raising revenue and maintaining incentives to work and innovate and whether complexity and compliance costs need to be reduced. The over reliance on income tax is only set to increase further due to wages growth leading to bracket creep. As the tax base becomes eroded by an aging population and capital becomes more mobile than ever, this needs to be future proofed. Australia s tax burden currently falls heavily on a few taxpayers. The Government statistics show that 12 companies are paying around a quarter of all company tax in Australia. This places Australia s revenue at risk because of the ease in which multinationals can relocate their operations offshore especially in an environment where other countries are cutting corporate tax rates (refer to Charts 2.10 and 5.4 on pages 27 and 76 of the DP which are reproduced in Appendix 1 of this Tax Alert). The UK further reduced the corporate tax rate to 20% effective 1 April Who is affected? The DP is organised into 11 chapters, commencing with an outline of Australia s tax system and various broad ranging challenges, and then provides more targeted discussions relevant across various sectors (individuals, general business, small business and not for profits), a focus on savings, a focus on specific taxes (GST, state taxes and indirect taxes), and concludes with tax administration and tax system design and governance considerations. The ordering adopted in the DP highlights the current political reality that the broader community needs to be on board, engaged and supportive of the tax reform process for it to be successful. It is commendable that the Government is ruling nothing in or out at this stage and is seeking responses from various sections of the community. The major challenges that confront the Australian tax system discussed in the DP include: challenges from global developments; improvements in productivity and workforce participation as highlighted in the recent Intergenerational Report; and the potential for tax reform to improve productivity and economic growth (including jobs). Whilst the DP is quite lengthy at 202 pages, it is considerably more compact than the 342 page Architecture of Australia s Tax and Transfer System paper that was released as the first paper of the Henry tax review in Notwithstanding, we commend the DP which contains very usable, novel, updated information, which should be carefully considered by interested parties. We have set out below a summary of some key themes and issues considered in the DP across the various sectors and taxes. Corporate tax The DP sets the scene for potential changes to Australia s corporate tax system, including potential tax rate cuts. The DP includes data that shows that Australia relies more heavily on corporate income tax than most other countries. The DP includes modelling which suggests that some taxes with high costs to economic growth and living standards are company tax and stamp duties. Importantly, in relation to selling the benefits of company tax reform, the DP outlines the benefits of reducing the economic costs of taxation are spread throughout the economy, including workers. EY Page 2

3 The DP suggests that reducing Australia s corporate tax rate would increase Australia s appeal as a place to do business and encourage higher levels of investment in Australia and lead to capital deepening, which promotes growth in productivity, innovation, employment and wages. Australia s existing dividend imputation system is also considered in the DP, which makes the important point that imputation ensures there is no double taxation on income from Australian shares owned by Australian resident shareholders. This is then tempered by a suggestion that imputation makes little contribution to attracting foreign investment to Australia. The DP has queried the future of the imputation system with increasing globalisation, but also considers whether it could be improved, including through the mutual recognition of imputation credits between Australia and New Zealand. GST, State and Indirect Taxes The DP invites comments on potential changes to the rate and scope of Australia s GST. Organisations seeking for indirect tax reform to be given appropriate and significant consideration in Australia will need to speak up in this first round of consultation before 1 June. The DP examines Australia s GST and also the major taxes raised by state, territory and local governments. The tax reform process will take into account a corresponding process underway on the reform of the Federation including which taxes are levied by the different levels of government. The DP identifies studies that have suggested there are significant economic gains associated with state tax reform, particularly reducing stamp duties and making greater use of potentially efficient payroll and land taxes. In relation to consumption taxes (including the GST) the DP outlines that Australia has a lower reliance on consumption taxes than most developed countries. The GST is Australia s thirdlargest tax source, raising approximately 16% of total Australian Government tax revenue. Australia s GST rate is one of the lowest among developed countries and is roughly half of the average rate among OECD countries. The DP also considers some pressures on the GST base including the digital economy and changing consumption patterns. Against that backdrop the DP seeks input on whether the existing settings (rate, base and administration) should be changed. Indirect taxes levied on specific goods and services, including fuel taxes, alcohol taxes, tobacco tax, the Luxury Car Tax, agricultural levies and tariffs as well as financial transaction taxes, corrective taxes and user charging are also discussed in the DP, which has requested feedback to questions on the appropriate mix of those taxes, rates, bases and administration. Financial services and savings Differing tax treatments apply to income from savings depending on how they are held. This tax differential has implications for taxpayers saving decisions. The DP seeks comment on the taxation treatment of interest income, the capital gains tax discount, dividend imputation system, negative gearing, superannuation, as well as alternative approaches to taxing income from savings. The paper notes that introducing a discount on income from bank deposits would require careful consideration. The Government has also committed to consulting with industry stakeholders in coming months to extend the range of collective investment vehicles that can be offered by Australian funds managers, to assist the export of financial services. Any proposals developed will be included in the Options Paper. Individuals Personal income tax is the most important source of government revenue, accounting for 39%. Australia s individual income tax system is very progressive compared to other countries. Over time, as tax thresholds are not indexed, this gives rise to bracket creep. Bracket creep can adversely affect behaviour including on tax planning and workforce participation decisions. The DP seeks responses on what the individual income tax, fringe benefits tax, and the transfer systems should look like and queries whether they appropriately balance competing objectives of raising revenue whilst also being economically efficient and delivering fairness. EY Page 3

4 Small business The DP acknowledges at the outset that the Government will deliver a small business package to expand opportunities in 2015, ahead of the Tax White Paper process. The DP makes a number of observations on the characteristics of the tax system that may impact small businesses and their owners and outlines some potential tax reforms in response, for feedback. The paper raises the concept of a new single flow through entity structure for small business, similar to the S-corporation available in the United States. This alternative could decrease the complexity and costs involved in choosing and establishing a small business structure, although the tax treatment would not include the flexibility available in using a discretionary trust. It also outlines an alternative lower or zero tax regime for small business in exchange for giving up the various current small business tax concessions, including for example the capital gains tax small business concessions, concessional rules for reporting and paying GST and other specific small business targeted concessions. The potential benefits of such a regime is said to include that it might encourage small business to spend their resources on expanding their business rather than in managing their tax affairs. Not for profits The not for profit (NFP) sector should ensure that it engages in the initial consultation process, in light of the broad ranging issues that have been raised in the DP for the sector. These cover both the potential for enhanced tax concessions and administration but also potential concerns about competitive advantage compared to the tax arrangements for for-profit organisations. Complexity and administration Some complexity is inevitable but the DP asks whether it is time to develop some metrics to measure the level of complexity and what can be done to better identify the sources of complexity. It is pleasing that the scope of this section goes well beyond the role of the ATO in administering a complex system. Tax system governance Australia needs to take the politics out of tax reform processes, which have broadly failed us in recent years. Chapter 11 asks a number of important questions (refer to Appendix 2). EY released Tax reform: A better way in 2014 highlighting the need to depoliticise tax reform in a way that recognises both the acute and long-term need for effective process. The report recommended an independent Australian Tax Reform Commission to oversee tax reform matters and take on the responsibilities currently performed by the Board of Taxation and some functions of the Australian Treasury. Since we called for a Tax Reform Commission we have received support for this idea from a number of interested parties. By putting the right processes and institutions in place we can build a tax system that is fair, encourages productivity and meets the revenue requirements of the nation. The Tax Reform Commission, if supported, will not be in place in time for this reform process. We think agreeing what the Commission s constitution could look like would be a worthwhile interim step and some of the agreed principles could help with this process. How EY can help We think it is imperative for businesses, as well as other stakeholders, to be actively and directly involved in this tax reform process. It is important for businesses to be involved to advocate their positions and not leave it to chance particularly as part of this initial consultation process. EY can help with the development of submissions due 1 June 2015 to advocate their point of view. Our tax policy modelling services team can also model the effects of policy changes advocated. EY will be an active participant in the consultation process and encourages all with an interest in an efficient tax system to get involved. EY Page 4

5 Appendix 1: Charts from the Treasury Re:think tax discussion paper Source: The Australian Treasury Discussion Paper Re:think tax (30 March), pages 18, 27 and 76 EY Page 5

6 Appendix 2: 66 questions from the Treasury Re:think tax discussion paper Challenges for Australia s Tax System 1. Can we address the challenges that our tax system faces by refining our current tax system? Alternatively, is more fundamental change required, and what might this look like? Australia s Tax System 2. How well does Australia s utilisation of its available taxes align with the evolving structure of Australia s economy and changes in the international economy? 3. How important is it to reform taxes to boost economic growth? What trade-offs need to be considered? 4. To what extent should reducing complexity be a priority for tax reform? 5. What parts of the tax system are most important for maintaining fairness in the tax system? Are there areas where fairness in the tax system could be improved? Individuals 6. What should our individuals income tax system look like and why? 7. What should our fringe benefits tax system look like and why? 8. At what levels of income is it most important to deliver tax cuts and why? 9. To what extent does taxation affect people s workforce participation decisions? 10. To what extent are the interactions between the tax and transfer system straightforward for the people who deal with both systems? 11. How important is tax as a factor influencing people s decisions to work in other countries? 12. To what extent is tax planning a problem in the individuals income tax system? Are existing integrity measures appropriate? 13. What creates incentives for tax planning in the individuals income tax system? What could be done about these things? 14. Under what circumstances is it appropriate for assistance to be delivered through tax offsets? 15. To what extent do our arrangements for work-related expense deductions strike the right balance between simplicity and fairness? What could be done to improve this? 16. To what extent does our fringe benefits tax system strike the right balance between simplicity and fairness? What could be done to improve this? 17. To what extent are the concessions and exemptions in the fringe benefits tax system appropriate? Savings 18. What tax arrangements should apply to bank accounts and debt instruments held by individuals? 19. To what extent is the rationale for the CGT discount, and the size of the discount, still appropriate? 20. To what extent does the dividend imputation system impact savings decisions? 21. Do the CGT and negative gearing influence savings and investment decisions, and if so, how? 22. How appropriate are the tax arrangements for superannuation in terms of their fairness and complexity? How could they be improved? 23. What other ways to improve the taxation of domestic savings should be considered? How could they be applied in the Australian context? General Business Tax Issues 24. How important is Australia s corporate tax rate in attracting foreign investment? How should Australia respond to the global trend of reduced corporate tax rates? 25. Is the dividend imputation system continuing to serve Australia well as our economy becomes increasingly open? Could the taxation of dividends be improved? 26. To what extent would Australia benefit from the mutual recognition of imputation credits between Australia and New Zealand? 27. To what extent does the tax treatment of capital assets affect the level or composition of investment? Would alternative approaches be preferable and, if so, why? 28. How complex is the tax treatment of capital assets and are the costs of compliance significant? 29. To what extent does the tax treatment of losses discourage risk-taking and innovation and hinder businesses restructuring? Would alternative approaches be preferable and, if so, why? 30. How could the current tax treatment of intangible assets be improved? 31. To what extent should the tax system be designed to attract particular forms of inbound investment (for example, by distinguishing between active and passive or portfolio and non-portfolio)? If so, what principles should inform this? 32. To what extent does the tax treatment of foreign income distort investment decisions? 33. To what extent should the tax system be designed to encourage particular forms of outbound investment (for example, by distinguishing between active and passive or portfolio and non-portfolio)? If so, what principles should inform this? 34. How can tax avoidance practices such as transfer pricing be addressed without imposing an excessive regulatory burden and discouraging investment? 35. Should the tax system provide a more neutral treatment of different financing arrangements (debt, equity and retained earnings), and if so, how? What principles should inform the approaches? 36. Should the tax system provide a more neutral treatment of income earned on revenue account and capital account? Does the distinction create significant compliance costs for business and, if so, how could it be simplified? 37. Are there other important issues in the business tax system, not covered in this section, which should be considered as part of the Tax White Paper process? EY Page 6

7 38. In what circumstances is it appropriate for certain types of businesses to be subject to special provisions? How can special treatment be balanced with the goal of a fair and simple tax system? 39. Does the R&D tax incentive encourage companies to conduct R&D activities that would otherwise not be conducted in the absence of government support? Would alternative approaches better achieve this objective and, if so, how? 40. What other taxation incentives, including changes to existing measures, are appropriate to encourage investment in innovation and entrepreneurship? Small Business 41. What effect is the tax system having on choice of business structure for small businesses? 42. What other options, such as a flow-through entity (like an S-Corporation), would decrease the overall complexity and costs for small business involved with choosing a business structure? How would such an entity provide a net benefit to small businesses? 43. Is the interaction of the personal and business tax systems a problem? What can be done to manage the personal-business tax interactions? 44. What are the most significant drivers of tax law compliance activities and costs for small business? 45. How effective is the current range of tax concessions (such as CGT and industry specific concessions) at supporting small business engagement with the tax system? To what extent do the benefits they provide outweigh the compliance, complexity and revenue costs they introduce? 46. What other mechanisms (such as a single lower tax rate, improved technology deployment or other non-tax mechanisms) could assist small businesses to engage with the tax system while decreasing compliance and complexity costs? Not for Profit 47. Are the current tax arrangements for the NFP sector appropriate? Why or why not? 48. To what extent do the tax arrangements for the NFP sector raise particular concerns about competitive advantage compared to the tax arrangements for for-profit organisations? 49. What, if any, administrative arrangements could be simplified that would result in similar outcomes, but with reduced compliance costs? What, if any, changes could be made to the current tax arrangements for the NFP sector that would enable the sector to deliver benefits to the Australian community more efficiently or effectively? 50. To what extent are the tax settings (that is, the rate, base and administration) for the GST appropriate? What changes, if any, could be made to these settings to make a better tax system to deliver taxes that are lower, simpler, fairer? GST and State Taxes 51. What are the relative priorities for state and local tax reform and why? In considering reform opportunities for particular state taxes, what are the broader considerations that need to be taken into account to balance equity, efficiency and transitional costs? 52. Does each level of government have access to tax revenue bases to finance new spending decisions? If not, should arrangements change to achieve this? How should they change? How important is it that the national government levies taxes on mobile bases? Could some taxes be shared? 53. To what extent does Australia have the appropriate mix of taxes on specific goods and services? What changes, if any, could improve this mix? Indirect Taxes 54. To what extent are the tax settings (i.e. the rates and bases and the administration) for each of these indirect taxes appropriate? 55. What changes, if any, could be made to these indirect tax settings to make a better tax system to deliver taxes that are lower, simpler, fairer Complexity and Administration 56. What parts of Australia s tax system, and which groups of taxpayers, are most affected by complexity? What are the main causes of complexity? 57. Would there be benefit in developing an Australian metric for tax complexity? What factors should be included? How should they be combined into a metric? 58. What system-wide approaches could have the greatest impact on reducing complexity in the tax system? Why have previous attempts to address complexity in the Australian tax system not succeeded? How might it be done in a way that is more successful? 59. In what ways can reforms of tax administration best assist in reducing the impact of complexity on taxpayers? Are there examples from other countries of tax administration reform to reduce the impact of complexity that Australia should adopt? 60. What processes or systems currently being used by businesses and individuals could the ATO better utilise to lower the compliance costs of the tax system? 61. Could administrative responses such as embracing technology, harnessing data and taking the whole-of-government approach to administration help address the issue of tax system complexity? 62. Would there be benefits in integrating the administration of taxes across the Federation? If so, what would be required to realise these benefits? Tax System Governance 63. What changes could be made to provide greater certainty, transparency and accountability to tax policy development in Australia? 64. Are current tax review arrangements appropriate? How could they be improved? 65. Could the arrangements for developing tax policy in Australia be improved? If so, how? 66. Would the benefits of releasing more tax data and detail around costings outweigh the costs EY Page 7

8 Tax Leaders and Tax Policy EY Oceania Tax Leader Craig Robson Tel: craig.robson@au.ey.com Business Tax Services Adelaide Sean van der Linden Tel: Sean.van.der.Linden@au.ey.com Brisbane Paul Laxon Tel: paul.laxon@au.ey.com Canberra Todd Wills Tel: todd.wills@au.ey.com Indirect Tax Melbourne Brad Miller Tel: Brad.Miller@au.ey.com Mark Tafft (National Leader) Tel: mark.tafft@au.ey.com Human Capital Adelaide Craig Whiteman Tel: craig.whiteman@au.ey.com Brisbane Shannon James Tel: shannon.james@au.ey.com Melbourne Anne Giugni (National Leader) Tel: anne.giugni@au.ey.com EY Oceania Tax Policy Leader Alf Capito Tel: alf.capito@au.ey.com Melbourne Ian McNeill Tel: ian.mcneill@au.ey.com Perth Basil Mistilis Tel: basil.mistilis@au.ey.com Andrew Lapa (National Leader) Tel: andrew.lapa@au.ey.com Perth Gavin Shanhun Tel: Gavin.Shanhun@au.ey.com Perth Tanya Ross Jones Tel: tanya.ross.jones@au.ey.com Asher Joseph Tel: asher.joseph@au.ey.com Nick Pond Tel: nick.pond@au.ey.com Financial Services & Asset Management Grant Peters (Financial Services) Tel: Grant.Peters@au.ey.com Antoinette Elias (Asset Mgmt) Tel: Antoinette.Elias@au.ey.com EY Assurance Tax Transactions Advisory About EY EY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities. EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit ey.com. About EY s Tax services Your business will prosper as you build it on a strong foundation and grow it in a sustainable way. At EY, we believe that managing your tax obligations responsibly and proactively can make a critical difference. Our global teams of talented people bring you technical knowledge, business experience and consistency, all built on our unwavering commitment to quality service wherever you are and whatever tax services you need. We create highly networked teams that can advise on planning, compliance and reporting and help you maintain constructive tax authority relationships wherever you operate. Our technical networks across the globe can work with you to reduce inefficiencies, mitigate risk and improve opportunity. Our 38,000 tax professionals, in more than 140 countries, are committed to giving you the quality, consistency and customization you need to support your tax function. For more information, please visit Ernst & Young, Australia. All Rights Reserved. SCORE NO: AU This communication provides general information which is current as at the time of production. The information contained in this communication does not constitute advice and should not be relied on as such. Professional advice should be sought prior to any action being taken in reliance on any of the information. Ernst & Young disclaims all responsibility and liability (including, without limitation, for any direct or indirect or consequential costs, loss or damage or loss of profits) arising from anything done or omitted to be done by any party in reliance, whether wholly or partially, on any of the information. Any party that relies on the information does so at its own risk. Liability limited by a scheme approved under Professional Standards Legislation. EY Page 8