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30 March 2015

Tax white paper: Treasury urges more GST, less income tax

Steering the response to proposed taxation changes: Prime Minister Tony Abbott in Victoria on Sunday.

The Commonwealth Treasury has set out the case for an increase in Australia's rate of goods and services tax and a series of cuts in income and company tax, saying that at 10 per cent, Australia's GST is one of the lowest in the developed world.

In a discussion paper released to encourage contributions ahead of a white paper that will set out the government's priorities on tax, the Treasury says that of the 33 developed countries that have taxes similar to the GST, only 3 charge less than Australia.

The OECD average is just below 20 per cent, almost double what Australia is charging. Australia raises $56 billion from the GST. If it boosted the rate to 15 per cent it could raise $80 billion.

The department is also worried about the growing importance of spending on items not subject to the GST such as health and education and goods sold online. It says the proportion of sales covered by the GST has slipped from 56 to 47 per cent in the past 10 years.

The discussion paper is the first occasion on which the Treasury has been able to make public its views about the GST. The Rudd government prevented the department from considering the GST in preparing the Henry Tax Review.

In a sign the contents of the white paper will cause problems for the Abbott government, it has inserted a sentence into the discussion paper saying it will consider proposals to change the GST only if there is "broad political consensus for change, including agreement by all state and territory governments".

Treasurer Joe Hockey said the discussion paper marked "the start of a conversation about how we bring a tax system built before the 1950s into the new century".

He said globalisation and the rise of the digital economy had the potential to render Australia's heavy reliance on income taxes unsustainable.

The paper says among the OECD nations, only Denmark relies more heavily on income and company taxes than Australia. Left unchecked, the process known as bracket creep will push more Australians into higher tax brackets. Australians on average full-time earnings at present pay 22.7 per cent of their income in tax. By 2023, they would pay 27.4 per cent.

The treasury says Australia's company tax rate of 30 per cent is well above those of countries with whom it competes. One third of company tax is paid by just 12 companies. The department says if the rate was cut, half of the benefit would most likely accrue to employees of those companies who would benefit from greater investment, greater productivity and higher wages.

The paper calls into question the concession known as dividend imputation, which allows Australian shareholders to deduct from their personal tax company tax already paid by the companies that pay them dividends. It says the concession is not available to the foreign investors Australia needs to attract and asks whether it is "continuing to serve Australia well".

Rather than critiquing the practice known as negative gearing, which allows Australians to write off against their income tax losses made from rental properties, the Treasury calls into question the tax arrangements that makes it profitable. Since late 1999, capital gains tax has applied to only half of the profit made when each rental property is sold. The paper says it is this arrangement rather than negative gearing itself that is driving investment in rental properties.

It says Australia's taxation arrangements for savings are uneven with saving through bank deposits taxed highly, savings through property taxed at half the rate, savings through Australian shares taxed even less, saving through domestic housing taxed not at all and saving through superannuation tax advantaged. It raises the prospect of one standard rate of tax for all forms of saving, as suggested by the Henry Review.

The paper effectively rules out taxing the family home or the reintroduction of death duties. It confirms that by international standards Australia is lightly taxed.

The Treasury has asked for submissions by the end of May. It will produce a draft white paper in the second half of the year and a final white paper by December. Mr Hockey said the paper would feed into the policy preparation process for the 2016 election.