Speech - A Tax System Redesigned: Taking Stock - Address to the National Press Club [21/03/2003]
"A TAX SYSTEM REDESIGNED: TAKING STOCK"
Address to the National Press Club
Senator the Hon Helen Coonan
Minister for Revenue and Assistant Treasurer
21 March 2003
CANBERRA
Thank you for the opportunity to address you today.
A recent feature article in The Economist on Australia's stand out economy,
written in the shadow of a looming war with Iraq, posed the intriguing question:
Is Australia's economic miracle sustainable?
The article observed: "The country is now in its 12th year
of uninterrupted economic expansion, having shrugged off both the East Asian
crisis of 1997-98 and the global downturn in 2001." It goes on to say:
"Not surprisingly, the OECD declared the Australian economy to be one
of the rich world's best performers."
It then goes on to ask "Will its luck hold?"
Looking forward, the question of whether our strong economy can be sustained
through what are highly uncertain times, is something that is very much on the
minds of Treasury Ministers as we shape the upcoming Budget.
The external challenges facing our economy now are significant and we cannot
pretend that we will be immune from a tougher and more uncertain economic outlook.
In the Government's Mid Year Economic and Fiscal Outlook released late last
year, we predicted that conditions in most of our major trading partners would
remain subdued, with the outlook largely dependent on developments in the United
States.
Notwithstanding the expansionary policy settings in place in the US, Japan
and to a lesser extent Europe, the downside risks to the international outlook
continue to dominate.
I know that some might argue that Australia's success in staring down the dramatic
impact on the region of the East Asian economic crisis, might mean that we can
afford to be somewhat relaxed about our ability to continue to grow strongly.
The Government does not share this view.
Our success is not a stroke of luck or an accident, it is the result of a sustained
reform effort, combined with prudent and responsible fiscal and monetary policy
management.
As recently noted by the OECD, one of the main drivers underpinning economic
reform has been the reform of Australia's tax system.
Tax reform has been dramatic and far-reaching and has comprehensively addressed
critical issues concerning equity, revenue security and the integrity of the
tax system.
Given that the Howard Government is now mid term, I think the time is right
to take stock of our tax system.
Despite the current focus on Iraq, the Government has not lost sight of what
remains to be done and is committed to ongoing reform of our tax system.
Today, I would like to address the following broad questions:
- What are the factors that have influenced the tax reform debate in this
country?
- What tax reform has already been achieved?
- What administrative challenges remain?
- What are the barriers to further tax reform? and
- What are the future challenges we face?
Specific country influences on tax policy
Some features peculiar to Australia are important influences on our tax policies
and approach to tax reform.
Australia has a population of almost 20 million (0.3 per cent of the world's
total) and an economy that is about 1 per cent of the global economy.
Many countries within our region have tax regimes with relatively low tax rates.
Constitutionally, the States and Territories have limited taxing powers and
are prohibited from levying excise or income taxes. This means large fiscal
transfers from the Commonwealth are necessary to allow States to provide the
services our communities require.
Australia has no estate, inheritance or gift taxes.
Australia has a means tested "safety net" public pension scheme funded
from general revenue instead of a national social security scheme.
The tax system influences and is influenced by a range of economic and fiscal
policies, including interactions with retirement savings; the welfare system;
the labour market and various global factors. Of course, these influences also
require close cross portfolio interaction in the development of tax policies.
Was tax reform necessary?
In assessing our progress towards delivering a modern tax system I think it
worthwhile spending a moment to remind ourselves why our tax system needed a
comprehensive overhaul.
This will bring the magnitude of the agenda required to bring our tax system
into the 21st century into clearer perspective.
Up until the late 1990s, Australia had a tax system built on the social and
economic base of an earlier era. It was unsustainable.
As a significant proportion of Government spending had been funded not by taxes,
but by borrowing - by the time the Howard Government took office, Government
net debt had blown out to $96 billion.
Most taxpayers faced marginal tax rates of over 30 per cent and the States
lacked a secure revenue base.
The tax system distorted the investment environment and, through its interaction
with the social security system, created disincentives for individual effort.
The failings of our narrow, complex and shrinking tax base were compounded
by the fact that in a world of increasing globalisation, the tax system was
leaving Australian businesses at a competitive disadvantage.
Despite these problems, we had for decades been debating the need to introduce
a broadly based indirect tax that would shore up Australia's shrinking revenue
base.
In addition, the business tax system lacked coherence and a sound structural
framework - it was acting as a drag on the economy and its performance.
What was required was a tax system that would generate sufficient revenue to
fully pay the way of government, sustaining the living standards for future
generations of Australians.
The time was ripe for the introduction of A New Tax System to broaden
the tax base and to reduce tax rates. It was also time to develop an internationally
competitive and structurally sound business tax system as envisioned in the
Ralph Review of Business Taxation.
Achievements in Tax Reform
Now that we have in place a New Tax System and are well advanced on
implementing business tax reform, it is not too early to ask whether the reforms
have met expectations.
I think it is fair to say that the trilogy of indirect, personal and business
tax reforms has ensured Australia now has a more efficient, internationally
competitive and robust tax system.
This has been vital in creating the economic settings for higher growth, more
jobs and improved savings.
The Government has introduced the most comprehensive and successful tax reform
ever attempted in Australia's history.
The GST, the cornerstone of the new indirect tax base, has met its goals:
- It is collecting the revenue that it was predicted to collect;
- It was introduced with the same price effects, in some cases even lower,
that it was predicted to have;
- Inefficient taxes, particularly the wholesale sales tax and financial institution
duties, have been abolished;
- All of the GST revenues are being paid to the States and Territories as
intended. This has been described as "growth funding" because GST
revenue enables the States to provide for schools, hospitals, roads and all
of the other services Australians demand and deserve;
- By removing all taxes on exports the GST has also improved the productivity
of the investment capital of Australian businesses;
- It funded the huge reduction in personal taxes the government intended
- worth around $12 billion per year;
- Most taxpayers now face a marginal tax rate of 30 per cent or less;
- Australians are also benefiting from increased government pensions, income
support allowances and family assistance arrangements - worth around $2 billion
per year; and
- The introduction of the Australian Business Number (ABN) has made it much
more difficult for those operating in the cash economy to avoid their tax
responsibilities.
The Government's responsible spending commitments, combined with our more robust
tax regime, have allowed the Government to deliver balanced budgets. This is
necessary to safeguard the living standards of future generations of Australians.
We are no longer living off the national credit card.
Business tax arrangements have been modernised and improved.
The centrepiece of these reforms has been the significant reduction in company
tax rates to an internationally competitive 30 per cent. Capital gains tax changes
have provided further efficiencies by removing indexation and replacing it with
a halved rate of tax for individuals and trusts and exempting one third of the
gain for superannuation funds.
Tax rate reductions were funded by complementary measures that broadened the
business income tax base.
Significantly, the Uniform Capital Allowance Regime removed accelerated depreciation
for plant and equipment and aligned depreciation rates with the effective economic
life of the asset.
Exceptions to the effective life regime have been tightly targeted. They are
directed solely to industries of national significance that can demonstrate
competitive disadvantage and are assessed on a case by case basis.
Business tax reforms including alienation of personal services income, thin
capitalisation and non-commercial loss measures have enhanced the integrity
of the tax system.
The new consolidation regime, de-merger tax relief and the simplified imputation
system will reduce the tax compliance burden over time and facilitate commercial
restructuring of businesses.
The Government has also listened and been responsive to industry calls for
specific tax initiatives to remove impediments to business investment.
Recent venture capital reforms have been designed to provide an internationally
competitive framework to encourage more foreign investment and expertise in
Australian business.
This is critical to Australia's ability to realise our innovation potential
and thereby deliver more productivity growth.
In addition, proposed changes to the tax exempt leasing arrangements will encourage
continued financing of essential infrastructure by the private sector.
The Minister for Revenue's role in the tax system
But change is never easy. As the saying goes there is no gain without pain
and there is no doubt that the changes led to some disenchantment with the implementation
of the New Tax System, particularly for small business.
The creation of a dedicated Ministry for Revenue after the 2001 election was
a clear recognition by the Government of the need to re-engage with taxpayers
and the business community.
In coming to this portfolio I was determined to engineer a changed tax culture
- one that is more open, consultative and responsive to the legitimate interests
of the community.
It remains a work in progress but there is now a road map to follow.
My immediate priority was to ensure that existing tax reform measures are effectively
implemented and bedded down. I expect that this will be an ongoing process because
some of the more significant tax reform measures will, of necessity, require
further fine-tuning.
Some of the ongoing problems can be resolved by consultation between taxpayers
and the ATO and an administrative solution reached. Other problems may require
the development of a legislative response.
Either way, the message is that the Government is responsive to taxpayers -
we need the system to work.
There has also been a clear need to engage the business community in the design
and development of our tax laws. A large part of my portfolio responsibility
is to listen and respond to the many tax policy and administration issues of
concern to the community.
While this will always be a critical part of my role in facilitating necessary
changes to the tax system, the appropriate framework for tax design was also
in need of renovation.
A new integrated policy framework to improve the design of tax legislation
has now been implemented with three key features.
In 2002, the legislative design function was transferred from the ATO to Treasury.
This has had a number of advantages. It has freed the ATO so it can better focus
on its core business of tax administration.
At the same time it better enables legislation to be developed in a manner
consistent with what the Government intended.
There was also a compelling need to strengthen the consultation process with
the community in developing tax law. The Government no longer subscribes to
the view of Otto van Bismark that " Laws are like sausages. It's better
not to see them being made".
Consultation and co-design have now become entrenched features of the tax development
process. Consultation has been fundamental to the development of significant
business tax reform measures such as the new consolidation regime, which has
represented the most significant change to the taxation of corporate groups
in decades.
I wish to express my personal thanks to the many tax practitioners and business
representatives who have contributed to this process.
The third element to improving tax policy design has been the establishment
of the Board of Taxation. The Board is focussed on monitoring the effectiveness
of community consultation arrangements and will shortly begin to review the
quality and effectiveness of various pieces of tax legislation.
Taxation law operates in a dynamic environment. As everyone here is aware,
the tax law is constantly evolving - by way of judicial interpretation as well
as changes in government policy. Change will continue to be a feature of the
tax landscape and it is an important part of my role as Minister for Revenue
to have a framework to manage the evolution of the tax system.
Tax administration
Another major responsibility of the Revenue portfolio is oversight of tax
administration.
Securing a transparent, accountable and responsive tax administration system
is a critical plank in the Government's overall strategy of improving Australia's
tax system.
The Commissioner's role is that of day to day administration while the Government's
is to ensure the tax system is operating effectively.
The statutory independence of the Commissioner, and the secrecy provisions
that safeguard information about individual taxpayers, are important safeguards.
But this often means the Minister cannot be fully informed of the specific
issues a taxpayer is seeking assistance to resolve.
This structure has caused many to question how accountability for tax administration
actually works.
But the Commissioner is held accountable to the Parliament in a variety of
ways and his administration of the tax law is subject to judicial review.
The Executive sets the policy to make and amend the tax law; to set the Budget
for the ATO and has the ability to allocate administrative responsibilities
to the ATO.
In practice, effective oversight of tax administration requires cooperation
between the Minister and the Commissioner within the permitted framework.
However, the need to more effectively address the gaps in this process has
been recognised by the Government and an opportunity now exists to smooth the
process by which systemic tax administration problems are identified, assessed
and addressed.
The Government has proposed the creation of an independent statutory office,
the Inspector-General of Taxation, whose function will be to review tax administration
and report to Government with recommendations for improvements.
The Inspector-General of Taxation is an election commitment of this Government
and is an important plank in the raft of Government initiatives to improve the
operation of the tax system.
So it is particularly disappointing that the establishment of the Inspector-General
is being stalled by Senate amendments and is now at risk.
Despite initial scepticism when the role was announced, there now seems to
be broad consensus that the Inspector-General has the potential to make a significant
contribution to improving tax administration. This changed view is largely due
to the success of the extensive and inclusive public consultation process undertaken
by the Government in fleshing out the Inspector-General's role.
The Inspector-General of Taxation is an initiative that has the potential to
really give small business and individuals a voice in the tax administration
system. The community is behind the Government in wanting the Inspector-General
established now so it can be an advocate for the systemic problems taxpayers
have with tax administration.
It would be a great shame if this opportunity was missed and it is to be hoped
that common sense prevails and the Inspector-General of Taxation is given a
chance to succeed.
However, even in the absence of an Inspector-General of Taxation, there have
been significant improvements in the approach to tax administration.
The impact that the magnitude of tax reform has had on taxpayers has not been
lost on the Commissioner or the Government.
There are many examples where facilitation between the Ministry and the ATO
has opened up the lines of communication to assist taxpayers.
A recent important breakthrough initiative to assist tax practitioners has
included revised activity statement lodgement requirements to further reduce
tax practitioner workloads.
The cost of compliance remains a familiar and recurring complaint about tax
administration.
In addressing the need for simplified compliance, in theory at least, there
seemed to me to be advantages in differentiating the compliance burden between
taxpayers according to whether or not they pose a significant risk to the revenue.
A challenge has been to find ways to achieve this in practice.
It is gratifying to see that the Commissioner has now conducted an extensive
community consultation project: "Listening to the Community", so that
taxpayers can have a more direct say in how to meet their tax obligations.
The Commissioner has also announced a program designed to identify areas where
greater reliance on information already collected for business purposes can
be better used to meet tax obligations.
There is an overwhelming community interest in continuing to improve tax administration
and to work to find simpler, cheaper and better ways to help people deal with
the ATO.
The development of these initiatives has also highlighted the changing culture
within the ATO in dealing with such issues - one that is increasingly open and
outward looking.
There are many opportunities to examine administrative solutions to various
tax issues. I remain committed to maintaining the momentum now driving a renewed
focus on ways to deliver a simpler and more streamlined tax administration system.
Risks to our tax system from tax avoidance
No discussion of tax administration can overlook the vexed issue of tax avoidance.
Let me be perfectly clear. The majority of taxpayers meet their tax obligations
honestly, but the proliferation of aggressively marketed tax schemes has required
a sustained effort on the part of the ATO to address the threat to the revenue
posed by these schemes.
Measures to address the aggressive tax planning problem include a more transparent
process for issuing private binding rulings and product rulings together with
Taxpayer Alerts.
Some categories of cases with particular characteristics have benefited from
early resolution of tax disputes and, in appropriate circumstances, the Commissioner
is testing the law in a series of test cases.
None of these initiatives are to suggest that contrived tax avoidance is condoned.
The Government is not going soft on tax avoiders and has demonstrated its ongoing
commitment to combating tax avoidance by significantly increased resourcing
of the ATO in last years Budget.
While the ATO continues to provide a high degree of help and education to assist
the vast majority of people doing the right thing, it has also signalled an
increased focus on more active compliance including verification, field visits
and audits.
The Government has also acted on a number of fronts to combat tax avoidance.
We have introduced tax reforms aimed squarely at improving the integrity of
the business tax base including provisions to prevent loss duplication; limiting
immediate deductions for prepayments; and the alienation of personal services
income and non commercial loss measures.
The new consolidation and general value shifting regimes also address avoidance
issues within wholly owned corporate groups
The government has also advised it intends to crackdown on promoters of tax
avoidance schemes by enhancing the range of sanctions against them. This will
improve the equity of the tax system while at the same time providing strong
deterrents to promotion of tax avoidance.
This proposal is at an advanced stage of development. However, in finalising
its response, the Government will be conscious of the need to strike a balance
between stopping tax cheats while ensuring fairness for ordinary taxpayers and
legitimate promoters of new ventures.
Current tax reform program
Speaking of new initiatives leads me to briefly mention just a few business
tax reform measures that are being rolled out.
I have attached to this paper some further details of the forthcoming legislative
program.
I am also pleased to be able to announce today details of the consultation
process through which the Government will consider reforms to the tax treatment
of various blackhole tax expenditures and rights.
I invite taxpayers to make submissions on specific examples of blackhole expenditure
and rights that are considered to be taxed inappropriately under existing tax
law. This case-by-case examination will then facilitate the development of a
legislative solution for blackholes and rights more generally.
A press release outlining in more detail the consultation process will be distributed
at the conclusion of my address today.
International tax competitiveness
A key influence in the Government's future reform agenda is the need to ensure
our tax policies support Australia's economic competitiveness in an international
context.
The Government has successfully secured our tax base in relation to international
transactions - most recently through reforms to the thin capitalisation rules.
Our corporate tax rate and the taxation of capital gains are now internationally
competitive, leading to greater efficiencies in capital management and mobility.
These measures, together with our revised tax treaty arrangements with the
United States and others planned with key trading partners, have provided a
firm basis for Australia's tax competitiveness with most other OECD countries.
In addition, the Review of International Taxation Arrangements (RITA) recently
completed by the Board of Taxation is currently under consideration by the Treasurer.
The review has examined three key areas of our international tax competitiveness:
- Attracting equity for offshore expansion;
- Promoting Australia as a location for internationally focused companies;
and
- Promoting Australia as a global financial services centre.
Skilled employees have also become increasingly globally mobile and the tax
treatment of foreign expatriates must be addressed to ensure we remain able
to attract and retain a skilled workforce.
By blocking the Government's reforms to expatriate taxation in the Senate late
last year, the Opposition is actively preventing Australian businesses competing
efficiently for skilled foreign labour and ensuring they continue to bear additional,
uncompetitive labour costs.
Barriers to reform
Before I turn to future directions of tax reform, I want to say a few words
about the political barriers to tax reform.
In a robust democracy it is inevitable (some may say it is healthy) that not
everyone will agree about every aspect of the best way to improve Australia's
tax system.
But, the Government has delivered lasting improvements to the tax system that
are overwhelmingly in the national interest, despite opportunistic and sustained
resistance to tax reform in the Senate.
Labor's opposition to the introduction of the New Tax System, including
tax cuts, was one of the most protracted and cynical exercises in Australian
political history.
It was accompanied by a roll-back proposal that was never properly formulated
or explained. Thrown in for good measure was some serious scare-mongering about
how the reforms would cause a recession, precipitate out of control inflation
and cause misery for ordinary taxpayers.
But not content with opposing the New Tax System, Labor continues to
block other important reform initiatives. These include the proposed wind back
of the superannuation surcharge and the removal of tax impediments to expatriates,
including nurses, pharmacists, various health care therapists and other professionals
temporarily relocating to Australia.
Add their opposition to the Inspector-General, and it is fair to say that Labor
stand in the way of significant reform to both the tax law and more targeted
help for taxpayers.
What are the future directions for tax reform?
I mention political roadblocks in the path of tax reform because it is pertinent
to what can be realistically achieved by way of future tax reform.
Recent debate has asserted the need to reduce the top marginal tax rate.
The Government is committed to reducing personal income taxes when possible
and we have a strong track record on this front. The biggest personal tax rate
cuts in history were delivered as part of the New Tax System. We had
planned to further increase the threshold for the top marginal tax rate, from
$50,000 to $75,000, however faced with opposition in the Senate, the Government
could only secure the current top threshold of $60,000.
Such compromises are, unfortunately, part of the reality of tax reform implementation.
Of course, most informed taxpayers realise that there is actually much more
to the taxation debate than just statistics about tax burdens or personal tax
rate comparisons.
They may take some comfort in the fact that simply comparing marginal tax rates
across different economies can provide a distorted and incomplete picture.
When comparing our personal tax rates with other countries it should be remembered
that some countries impose state or local income taxes, as well as compulsory
employee social security contributions. When assessed on this "all in"
basis, Australia's top marginal tax rate is not out of step with other OECD
countries.
It is also easy to distort tax to GDP statistics by running large budget deficits.
This was a method used by the Opposition when in Government. Borrowing does
not reduce the incidence of taxation - it merely shifts the tax burden to future
generations.
A more constructive debate might therefore focus on the underlying policies
that sit beneath headline tax rates and the Government's rationale in developing
tax policies.
Conclusion - Working together productively
I hope that this stocktake of Australia's tax system has highlighted how far
we've come in the last few years. I think it is important at this stage to look
at the full panorama of tax reforms rather than judging our progress through
the prism of piecemeal and fragmented tax changes.
We have built up and strengthened the tax system through some of the most fundamental
reforms Australia has ever seen.
That Australia has embraced these reforms and that it has been done within
a short timeframe, is the envy of many countries.
However, the Government is aware that there has been much for the tax community
to adapt to and that more work is needed to achieve a more efficient administrative
and compliance system.
As Thomas B. Reed said "One of the greatest delusions in this world
is the hope that the evils of this world can be cured by legislation".
Now that the legislative program is largely complete we need to work constructively
together to ensure the reforms continue to deliver.
Change is never easy, particularly when it involves a tax system that is a
part of the lives of all Australians and all businesses operating in Australia.
Now that the foundations of tax reform are in place, I think it is time for
a debate about the community's appetite for further tax reform - to give the
community a say in what they consider important for the future of the tax system.
I look forward to us working together to maximise the benefits to Australia
of these reforms, so that the tax system continues to support a fair and prosperous
way of life for all Australians.
Thank you
Attachment: Tax Reform Highlights