Patricia Karvelas, The Australian , 28 February 2013
ROLLING back family tax benefits extended to mostly single-income families could save the federal budget $2 billion a year, new economic modelling has shown.
As the Gillard government considers a range of deep budget cuts to pay for its multi-billion-dollar disability insurance and school funding reforms, the National Centre for Social and Economic Modelling has identified massive savings from tightening eligibility for Family Tax Benefit Part B.
Under the $4.5bn payment, single parents – and couples with children where the primary earner earns up to $150,000 and the second earner no more than $25,600 – receive up to $150 a fortnight.
NATSEM’s modelling shows that removing the payment for families with combined taxable incomes of $100,000 onwards would save about $500 million a year. Applying the same new participation rules that apply to parenting payments when the youngest child turns eight, for single parents, and six for couples could save an additional $1.5bn a year.
The Gillard government is under pressure to find cuts to bring the budget back into surplus, having abandoned its pledge to do so this financial year.
It also faces questions over how it will pay for signature reforms including the national disability insurance scheme and the Gonski school funding reforms and has faced a vigorous campaign from the welfare sector to increase the unemployment benefit by $50 a week and provide more money to single mothers who have been moved on to the Newstart Allowance from the more generous parenting payments.
Business Council of Australia spokesman Scott Thompson said the entire tax system, specifically the interaction between benefits and tax, needed a major review to identify how money could be better spent.
“What’s needed is for government and opposition to commit to laying out a plan for comprehensive, long-term tax reform, including how the tax transfer system interacts,” Mr Thompson said.
“Continuing ad hoc changes to the tax system or cherry-picking issues will not address the sustainability or effectiveness of the tax system and will undermine confidence and risk jobs.”
Business community elder Don Argus, who declared last Saturday that growth in politically popular welfare spending was unsustainable, told The Australian yesterday that it was necessary to review how much was being spent on welfare before it became entrenched. “There’s got to be trade-offs to make way for new initiatives, because there are new initiatives required and that’s where we miss the boat,” the former BHP Billiton chairman and National Australia Bank chief executive said.
Mr Argus said there should be time limits on some welfare benefits because they could not be paid indefinitely.
NATSEM principal researcher Ben Phillips said the loss of Family Tax Benefit Part B would cost families about $3000 a year and, for single parents, “many of whom are already living in poverty and subject to the less generous Newstart payment, this sting would be very tough”.
For dual-income families, the savings were worth exploring, he said. “FTB B makes sense for single parents but less sense for couples, especially those with older children, in a policy environment where the focus is workforce participation, particularly of secondary, mostly female, earners,” Mr Phillips said. “More FTB B dollars flow to couple parents than single parents. Restricting the payment to families with incomes below $100,000 and removing the payment for couples only where the age of the youngest child is greater than five would save a more modest $930m a year.
“This would be a major policy reform and one that would likely entail increased demands on an already pushed childcare sector. Unfortunately, the government does not have a magic wand to solve all the world’s problems.”
Mr Phillips said it was “hard to imagine” the government committing to paring back FTB B in an election year, making about 350,000 households worse off, but that “something less brutal in the same direction may be feasible”.
An analysis by The Australian of the electorates most affected by NATSEM’s proposed change to the income threshold for eligibility shows that most would be Coalition seats.
Labor holds only five of the 21 seats, with high proportions of households in the income bracket that would be hit by the drop to $100,000 and who fit the profile of one parent working full-time and the other part-time.
However, of the five Labor seats that would be most affected, four are held on margins of less than 2 per cent, including Lindsay and Greenway in western Sydney, where Julia Gillard has announced she will be based for five days next week.
A spokesman for Wayne Swan said the Treasurer did not comment on speculation about what measures would be included in the budget.
Mr Phillips said that, ideally, FTB B would be rolled in with the more tightly targeted Family Tax Benefit Part A, as suggested in the Henry tax review, and removed at about 20c in the dollar as family income increased. Combining the payments would avoid the current scenario where families who received both Part A and Part B effectively lost 40c in the dollar – 20c from each – usually when the second parent returned to work.
“Overall, the bulk of family payments are reasonably well targeted but there are areas where the payment could be trimmed or better designed to offer better workforce participation incentives and more equitable outcomes,” Mr Phillips said.
“The trimmings may provide some savings to the budget but unless governments are to take a major change of direction in welfare policy these savings will remain at the margin only of the $20 billion dollar program.”
He said other areas that could be considered for savings would include the Schoolkids Bonus of about $150 million going to families earning $100,000 or more.
He said the Baby Bonus was significantly higher than the up-front costs of having a baby, and was therefore not well targeted.
He said there was little evidence supporting such payments as the Large Family Supplement or Multiple Birth Allowance.
“Most of these elements were discussed in the Henry taxation review,” Mr Phillips said. “It is generally thought that there are economies of scale with the number of children and the current system does not recognise this”.
Women’s Electoral Lobby veteran Eva Cox said she supported the welfare system, arguing that any reduction in family payments disproportionately hurt women.
Sarah Dingle, ABC News, 27 February 2013
It is a hard sell, but economists from the Australian National University say Australians would be better off with a higher tax on petrol.
They have compared petrol prices around the world and say if consumers had to pay more at the pump here we would use less fuel and buy more efficient cars.
One economist says if the petrol excise was again linked to inflation it would also generate almost enough money to pay for the Gonski education reforms.
Many drivers would already say they have been feeling some pain at the pump, but now economist Dr Paul Burke from the Australian National University says that pain should be taken up a notch to force motorists to change their ways.
He was one of the authors of a study looking at the effect of petrol prices on the take-up of fuel efficient vehicles in 132 countries around the world over a 13-year period.
“Higher prices lead to consumers using less petrol and also consumers deciding to purchase cars that are more fuel efficient,” Dr Burke said.
“We expect that to happen, but we worked out how big the effect is in our study.”
Burke says there are some lessons for Australia. Specifically, he examined the impact of the 2001 decision by former prime minister John Howard to stop the automatic indexation of the petrol tax, which effectively froze petrol excise duty at 38.1 cents a litre.
“Across the economy the effect is quite big. So we estimate that the fuel economy of new vehicles now sold in 2013 is about 2 per cent worse than it would have been,” he said.
“We’re using now probably about 3 per cent more petrol as a result of that decision.”
“I think we all want to see less reliance on fuel. We want to use less petrol for a whole bunch of reasons, but there are ways of getting people to do that other than just taxing them even more,” countered the president of NRMA Motoring and Services, Wendy Machin.
She says it would be better to offer rewards to motorists with more fuel efficient vehicles, like access to transit lanes or the best parking spots.
“I think you go out and ask a lot of families if they want to pay increasing amounts for their fuel, they’ll say no,” Wendy Machin added.
“People I don’t think feel it is their responsibility to pay for these changes. I think they are looking to their leaders and to public policy to come up with some better solutions other than just taxing them to death.”
As far as world petrol prices go, Dr Burke says Australia is in the middle of the pack. We are charged less at the bowser than in Europe or Japan, but more than in the US or oil-rich nations.
He wants to see the petrol excise duty once again rise with the rate of inflation, which he calculates would generate more than $5 billion of extra revenue every year.
“Returning to that now or sometime soon would make sense. If we don’t do that, then the revenue that we’re raising will be falling in real terms and the Government will have to look elsewhere for raising the revenue that it needs,” he said.
“Government revenue would be more than $5 billion more, which could fund a lot of things of course. It could fund Gonski reforms, for example.”
Dr Burke says one of the cheapest places to fill up around the world is oil-rich Venezuela where a full tank costs less than $2.
Christopher Matthews, TIME, 27 February 2013
The American Bankers Association, the lobbying group that represents America’s banking industry, has recently launched an ad campaign across Washington D.C. aimed directly at the nation’s credit unions. The print version of the campaign is to the point, reading simply:
“Today credit unions are a $1 trillion industry that pays no income tax. That’s nearly $2 BILLION every year that could help shrink the federal deficit. Now, credit unions want even more perks. It’s time to end credit unions’ indefensible and outdated special treatment. Enough is enough.”
I think it’s worth noting the irony in such a campaign, given that the for-profit banking sector has recently benefitted from unprecedented amounts of government support. Then again, it shouldn’t come as a surprise to find lobbying groups seeking advantages for its members — it’s kind of their job. (Also it should be remembered that the ABA represents banks of every type and size, not just those that have benefitted from TARP and implicit guarantees.)
But what exactly is the ABA’s problem with credit unions? Earlier this month, bipartisan legislation was introduced in the House of Representatives that would increase the limit on the amount credit unions can lend to their small business members. This is an area where community banks compete directly with credit unions, so it’s understandable that the bank lobby would take umbrage at any effort to allow credit unions to compete more for that business.
And it’s not difficult to understand the banks’ argument, either. After all, credit unions are exempt from corporate income tax, a policy that puts them at a distinct advantage because credit unions can undercut taxed banks on the prices of their loans and other services.
So who’s right here? Should credit unions be able to increase the amount of business loans they issue? Or should we keep that restriction — and, for that matter, get rid of the credit union tax exemption altogether?
Credit unions have been exempt from paying income tax since 1916, when the income tax was first instituted, because they are, “organized and operated for mutual purposes and without profit.” Credit unions were also given this advantage because, like Grameen Banks, they were often the sole source of financing for disadvantaged communities whose members had few assets and no way to prove their creditworthiness.
This is the reason that credit union membership has traditionally been restricted to groups that had a single “common bond” — to members of local labor unions, for example, or specific ethnic communities. These common bond requirements were actually used as substitutes for collateral or other credit risk mitigation efforts. Joining a credit union owned by people who already knew you well meant you could more easily prove your creditworthiness. And borrowing from members of your immediate community meant it was more likely you’d pay back the loan.
But accessing banking services is generally much easier for many Americans, and over time the common bond restriction has been eased by Congress. Many credit unions still require members to belong to a certain community, but others do not. As a result, many credit unions look a whole lot like community banks, except for the fact that they funnel their profits back to their customers (really their owners) in the form of higher interest payments on deposits, lower fees, and the ability and willingness to offer reasonably-priced financial services to business and individuals in low income communities.
This last reason is the only compelling argument I find for allowing credit unions to keep their tax-exempt status. By any measure, there is still dire need in certain communities for access to affordable financial services. According to a recent report from the Pew State and Consumer Initiatives, approximately 12 million borrowers spend $7.4 billion on payday loans each year, saddling themselves with exorbitant interest payments that often drive them deeper into debt. This fact alone should tell us that there is a desperate need for more credit unions who take this role seriously, and taxing credit unions will mean there will be fewer serving communities that need them most.
But not all credit unions focus intently on bringing banking services to low-income communities. Which brings us back to the question of whether Congress should increase the statutory limit on credit union business lending, from 12.25% of the credit union’s assets to 27.5%. How this change will further credit unions ability to fill their public purpose is difficult to see. Fred Becker of the National Association of Credit Unions argues that the measure is needed to increase lending to small businesses, and that this lending will help further the economic recovery. But the problem with the economy generally isn’t that banks are unwilling to lend to businesses — commercial and industrial lending is up sharply in recent quarters. The economy’s problem right now is lack of demand for businesses’ products and services, and easing regulations on credit unions won’t change that.
In addition, 70% of credit unions make no small business loans whatsoever, and just a small portion of credit unions who make member business loans are hitting their lending limits. What’s more, loans up to $50,000 don’t count towards the cap. So the case for raising the cap, which was instituted to promote credit union stability and to focus credit unions on their traditional role of promoting access to consumer financial services, feels a bit shaky to me. With so many millions of Americans relying on check-cashing services and payday lenders, shouldn’t Congress be focusing on policies that aid credit unions in helping those folks?
MICHAEL HOBBS, Australian Financial Review, 26 February 2013
Australia’s tax system is stifling entrepreneurs and stand-alone government funds are not enough to inspire a start-up culture, according to Sir James Dyson, the well-known British inventor behind the popular Dyson vacuum cleaner.
Speaking in Sydney during a promotional tour of Dyson’s latest water tap and vacuum technology, Sir James said Australia should provide generous tax relief to technology start-ups similar to tax regimes in the United Kingdom.
“You have very inventive people and very good universities but I think the problem is the government is not supporting it enough,” he said.
“If they think 45 per cent tax relief for start-ups in Australia is going to help – it won’t, it’s too small. We’re getting more than double that in Britain, the French government gives more than that. It just isn’t enough.”
It comes after the federal government announced a fresh $350 million round of equity funding through the government’s Innovation Investment Fund (IIF). The announcement failed to impress local entrepreneurs, who suggested the government was “re-hashing” an old strategy.
Sir James, whose wealth is put at around $US4.2 billion by Forbes, said funds do not attract entrepreneurs or investors.
“Creating a fund isn’t going to do it because people will have to apply to the fund and then some civil servant will make a decision about who gets the funds. Usually its the wrong decision because they’re not equipped to make the right decision,” he said.
“You should back people who have ideas and want to do them and the way you do it is through the tax system.”
Sir James said despite rampant patent litigation in the technology sector, he believes the patent system underpins innovation, because it forces inventors or companies to think about problems differently.
He said it was important that patent infringement was properly punished, so that the groups taking the risk to innovate could reap the rewards. “What you want to do is encourage lots of people to develop different technologies so you should really punish people who copy things,” he said.
“If you allow people to copy each other, you get no competition because they’re all making the same thing.
“The plagiarist has a wonderful time riding on the back of someone else’s risk and success and someone else’s development costs. Of course they are going to make it cheaper. They’re not interested in developing the next thing because they just want to copy the leader all the time.
“Plagiarism is, in my view, criminal and shouldn’t be allowed to happen at all.”
He encourages engineers or entrepreneurs to vigorously patent their designs and products or risk being undercut by cheaper offshore competitors.
“Patent things and patent them really well. It’s expensive but if you don’t you’ll be obliterated by these overseas plagiarists,” he said.
Sir James said it was possible for market leading companies, like Apple, to stay ahead of competition in the development of new products if they invest in long-term research.
“I’m an engineer, I’m not a businessman, and we put huge amounts of money back into research and development. We’re looking 10 years out, 15 years out, 20 years out so they won’t come through for another 20 years,” he said. “We fundamentally believe in it. That’s going to drive new products. I’m not content to be behind, I want to be way out in front.”
Frustration and anger with existing products drives James Dyson’s desire for innovation.
“It always starts with frustration and anger that things don’t work. You either start developing technology to cure that or you develop something else and some other technology that can solve the problem that has been bugging you for years,” he said.
“That’s how I developed the vacuum cleaner, I hated bags and then I stumbled upon the solution, cyclone technology.”
David Callahan, Citizens For Tax Justice, 26 February 2013
Elaine Kamarck and James Pinkerton both built careers in public policy as serious thinkers who weren’t easy to peg and seemed unbeholden to any narrow ideology or interest group. Whether you agreed with them or not, they at least were interesting and independent.
That was then. These days, Kamarck and Pinkerton are working with big business as co-chairs of the RATE Coalition, a 501(c)4 organization dedicated to corporate tax reform — but which makes such patently simplistic arguments in this area that it’s hard to fathom how two smart people like Kamarck and Pinkerton could lend their reputations to the enterprise.
Corporate taxes are a complex subject and, to be taken seriously on this topic, it helps to acknowledge this complexity. The basic argument of the RATE Coalition — as the name implies — is that the U.S. corporate tax rate is too high and that this undermines U.S. competitiveness and growth. As well, the RATE Coalition argues that various corporate tax breaks distort economic activity and hurt the U.S. that way, too — a double whammy. The solution they propose is to lower rates and close loopholes to achieve revenue-neutral reform.
This is not a novel argument, of course. The Simpson-Bowles Commission made the same argument and the Obama administration itself has called for reform along these lines. For sure, there is much to be said for a more streamlined corporate tax system which grants few special perks.
But what’s problematic about the RATE Coalition’s arguments — as presented on their website and various materials, including a recent letter by 20 economists — is that it doesn’t acknowledge basic facts about U.S. corporate taxes.
The most elementary fact is this: Yes, the U.S. has the highest statutory corporate tax rate in the world, as the RATE Coalition materials emphasize at every turn, but that doesn’t mean a whole lot. As any taxpayer knows, your official tax rate is in many ways far less important than what deductions you can take and what your effective tax rate is as a result — how much you actually pay — as well as your overall tax burden: what percentage of your income goes to taxes.
And here’s the thing about corporate taxes: In fact, the effective income tax rate paid by most U.S. corporations is not out of sync with our industrial competitors, nor is the overall burden of corporate taxes — as a percentage of GDP — higher than the OECD average.
Start with effective tax rates. Given all the various breaks offered to corporations, you might expect that their effective rates would have little to do with statutory rates, and you’d be right. A 2011 study by the Center for Tax Justice of the country’s most profitable businesses found that the average rate paid by these 280 businesses in 2008 to 2010 came out to 18.5 percent — way below the top statutory rate. In 2011, all corporations made about $1.8 trillion in profits and paid $181 billion in federal corporate income taxes taxes, according to the OMB. They also paid $46 billion in state corporate income taxes, for a grand total of $227 billion in federal and state corporate income. That’s an overall effective corporate tax rate of just under 13 percent.
Of course, as we all know, for many companies it can be much lower than that. According to the report by Citizens for Tax Justice, fully 78 of the 280 most profitable U.S. corporations had at least one year between 2008 and 2010 where they paid absolutely nothing in federal incomes taxes at all. The General Accounting Office reported in 2008 that two out of every three United States corporations paid no federal income taxes from 1998 through 2005.
So it’s no surprise that just two months ago, a study by the Congressional Research Service entitled “International Corporate Tax Rate Comparisons and Policy Implications” had this to say about how the U.S. corporate tax system stacked up against other countries: “Although the U.S. statutory tax rate is higher, the average effective rate is about the same, and the marginal rate on new investment is only slightly higher.”
We’re also doing okay in terms of the overall tax burden. In 2010, the average corporate tax burden in OECD countries was 2.9 percent of GDP. The burden in the United States was just below that average, at 2.7 percent of GDP. In Japan, it was 3.2; the U.K., 3.1; Canada 3.3; Australia 4.8; Germany 1.5; South Korea, 3.5; and so on.
Now, as I said earlier, there are good arguments for reforming the corporate tax system to bolster the U.S. economy. Giving perks to well-connected industries, like oil and gas, doesn’t make much sense. And one of the biggest problems with the system is the way it allows corporations to pile up profits in offshore tax havens untaxed thanks to deferral — creating incentives to keep money abroad and use it to invest abroad. Analysts who say that dropping the corporate tax rate would bring that money home are naive, because the rate will never be low enough to compete with tax havens like Bermuda. Deferral should be ended and corporations should be taxed worldwide on all their profits when they make those profits.
Corporate tax reform is an interesting and complex policy debate. It’s just the kind of debate where creative thinkers like Elaine Kamarck and James Pinkerton are needed. Instead, for whatever reason, they have thrown their reputations behind a corporate-funded effort that begins with an intellectually deceptive focus on tax rates and never acknowledges basic facts that anyone who follows this issue are familiar with.
We need a real debate over corporate tax reform, not one that starts with a lie.
The Economist, 23 February 2013
ANY idea that has bankers up in arms and America, of all places, whingeing about intrusive lawmaking must have something going for it, right? Wrong. The European Commission’s proposals for a financial-transactions tax (FTT), published on February 14th, are a masterpiece of bad design.
A group of 11 European Union member states, among them France, Germany and Italy, wants to impose a 0.1% tax on equity and debt transactions, and a 0.01% charge on derivatives transactions. These countries are pressing ahead on their own because other EU members, including financial hubs like Britain and Luxembourg, are opposed.
The notion of a tax on financial transactions is not new. Britain has been charging stamp duty on equity purchases since 1694. James Tobin, a Nobel prizewinning economist, proposed a global tax on foreign-exchange transactions in 1972. The idea of skimming a tiny bit of revenue off the top of financial trades, and retrieving money for taxpayers from an industry that has benefited greatly from their largesse, has the ring of natural justice.
The rates proposed sound negligible, but the tax would be imposed at each point in the transaction chain. A 0.1% rate therefore translates into something much bigger as securities move from seller to buyer via financial intermediaries. Even the headline rates are less innocuous than they look. A 0.1% charge on repo transactions, a way for banks to finance themselves overnight, turns into a 25% charge over the course of a working year. A 0.01% tax on a derivative trade sounds small, but is a hefty increase in costs given the large notional amounts involved—up to 18 times more than current costs in the most liquid markets, according to one calculation.
A Bank of Canada analysis of the effect of previous FTTs found that they tend to harm market quality, by increasing volatility, reducing volumes and raising the cost of capital. The early effect of a French equity FTT that was introduced last summer was to hit trading in the shares of smaller firms. Without a co-ordinated global approach, the taxes are also likely to be circumvented by savvier investors, leaving retail investors to pick up the bill. After Sweden levied an FTT in the 1980s, 60% of trading volume in the most actively traded share classes moved to London; the tax was repealed in 1991.
Even the commission says that the tax will have a small negative effect on long-run growth. And its impact could spread far beyond the 11 consenting countries. To prevent activity fleeing the FTT zone, the commission proposes to tax transactions on the basis of issuance as well as residency. So buying a share in Siemens, say, would incur the tax even if the counterparties were two American firms in Chicago. The proposal is not the only attempt to extend the laws of one state into the jurisdiction of another. The Dodd-Frank act does so with derivatives that involve an American counterparty; and foreign financial institutions are being forced to help Uncle Sam tax American citizens’ offshore assets.
Taxation without borders
In a world of mobile capital, it is tempting to legislate beyond borders. That might just work for America—having the world’s largest capital markets and its reserve currency gives you a bit of leverage—but is unlikely to for Europe. These plans threaten to give investors an extra reason not to buy Europe’s securities or transact with its institutions at a time when it can ill afford to drive away economic activity.
If the FTT-11 want to extract more money from finance, they should drop this idea and instead impose a levy on their own banks’ balance-sheets. That would be more precisely targeted, easier to collect and more respectful of legal jurisdictions. Unfortunately, the FTT has powerful political appeal, not least in Germany, where elections loom. Demands by the European Parliament to impose a cap on bankers’ bonuses are hard to oppose for the same reason (see article), even though they would encourage firms to raise fixed pay and increase their cost base.
Finance needed reform, which is why new rules on capital, liquidity and derivatives are coming in. They should make the financial system work better. This proposal will not.
Mike Steketee, ABC The Drum, 22 FEBRUARY 2013
Tax concessions on superannuation cost the Government $32 billion this year. That makes it worth asking whether it is money well spent, writes Mike Steketee.
“Hands off my super!” is the rallying cry from Australians outraged at suggestions the Government may announce cuts in tax concessions in this year’s budget.
It may be a sign of how strongly people feel about protecting their nest eggs but it also points to just how warped the debate on superannuation policy has become.
Many of those most vehement in their criticisms of the Government for squandering money and failing to get the budget back into surplus are also those who regard the tax concessions for superannuation as sacrosanct.
The same people who rage against the nanny state and the culture of entitlement often also seem to think that it is the job of government to give them whatever level of retirement benefits to which they aspire.
Some even argue that the low tax on superannuation contributions and earnings and the zero tax on super benefits after 60 are not concessions at all.
Whatever they are, they represent money the Government would otherwise have available for other purposes and that makes it worth asking whether it is money well spent.
The cost to revenue of the concessional treatment of superannuation reached $32 billion this year. That is almost 50 per cent more than the Defence budget and $2.3 billion above Commonwealth spending on education.
Treasury projects that the figure will jump to $45 billion by 2015-16, by which time it will overtake the cost of the age pension. So where is the sense of outrage about this budget-blowing, out-of-control 41 per cent increase in government spending, making it the fastest growing major area of government?
The sense of injustice about proposals for change often runs most strongly amongst so called self-funded retirees – that is, those not receiving an age pension.
Sure, it is commendable for those who can to provide for their own retirement. But the Government, aka taxpayers, tips in substantial amounts for these people, too, particularly if they are high income earners.
Treasury estimated last year that the top 1 per cent of income earners receive an average of $510,000 in government support for retirement over a lifetime, all of it in tax concessions. That compares to $250,000 for the bottom 10 per cent, nearly all of it through the pension. This turns on its head the notions of progressive income tax and needs-based welfare.
Defenders of the present system have been strident in their complaints about one of the few measures Wayne Swan has taken to pare back its generosity – placing a cap of $25,000 on the amount attracting tax subsidies that people can contribute to superannuation each year.
Much of the discussion proceeds on the assumption that $25,000 is both inadequate and an absolute limit. It isn’t and it isn’t.
There is nothing to stop people putting more into their super; it is just that, if they do, they have to pay tax of 46.5 per cent, which is what they would be doing anyway on incomes over $180,000.
If you aspire to build your super up so you can live the life of James Packer in retirement, go for it. Taxpayers, most of whom will be on lower incomes, will be contributing generously but the rest is up to you.
Those who rail against the iniquity of putting limits on the tax concessions really are spruiking for a flat tax because that is the basis of the compulsory super system.
The 9 per cent of wages going into super – rising gradually to 12 per cent over the next seven years – is taxed at a uniform rate of 15 per cent up to incomes of $300,000 and so are the earnings in the fund.
From this financial year the Government introduced a rebate which refunds the 15 per cent super tax for those on incomes up to $37,000. This removes one of the starkest inequities: even though people earning below $18,200 a year paid no tax on the rest of their income, they still lost 15 per cent of their super contributions to the Government.
Above that, the rebate is equivalent to a tax concession of 5.5 per cent, compared to 31.5 per cent for high income earners. Tony Abbott’s commitment to take away the low income rebate, on the grounds that it is supposed to be funded by the mining tax which he will abolish, has received much less attention than his more recent promise ruling out any “negative, unexpected changes” to the superannuation system in the first term of a Coalition government.
Apparently we cannot afford a tax break of up to $500 a year for lower income earners under an Abbott government but will have no trouble funding one of $19,000, which is the average annual benefit Treasury has calculated for the top 1 per cent.
Strictly speaking, there is no need for the Government to offer tax deductions at all under a compulsory superannuation system. There is the argument that forcing you to put money aside that you can’t touch until at least age 55 warrants a tax break. But that would be a stronger point if the tax concessions did more to reduce reliance on the age pension.
Thanks to very generous means tests, there will be only a slight rise in the proportion of people not qualifying for any age pension by 2050, according to Treasury projections. Although there will be a larger increase in those receiving a part rather than full pension, the overall cost of the pension still will go up from 2.7 per cent to 3.9 per cent of GDP by 2050 – or if you prefer that in current dollars, from $38 billion to $55 billion.
The case for a tax deduction also would be stronger if super actually had to be used for retirement income. Instead, there is nothing to stop people spending all their superannuation the day after they retire and going on to the pension. The Australian Prudential Regulation Authority says that in 2011-12, the $35 billion withdrawn as pensions almost exactly matched that taken out in lump sums.
As the proportion of future taxpayers shrinks and the cost of subsidising superannuation keeps outpacing the growth in the economy, future generations are unlikely to thank us for taking the money and running.
THE MISSING $20 TRILLION
HOW TO STOP COMPANIES AND PEOPLE DODGING TAX, IN DELAWARE AS WELL AS GRAND CAYMAN
The Economist, 16 Febuary 2013
CIVILISATION works only if those who enjoy its benefits are also prepared to pay their share of the costs. People and companies that avoid tax are therefore unpopular at the best of times, so it is not surprising that when governments and individuals everywhere are scrimping to pay their bills, attacks are mounting on tax havens and those that use them.
In Europe the anger has focused on big firms. Amazon and Starbucks have faced consumer boycotts for using clever accounting tricks to book profits in tax havens while reducing their bills in the countries where they do business. David Cameron has put tackling corporate tax-avoidance at the top of the G8 agenda. America has taken aim at tax-dodging individuals and the banks that help them. Congress has passed the Foreign Account Tax Compliance Act (FATCA), which forces foreign financial firms to disclose their American clients. Any whiff of offshore funds has become a political liability. During last year’s presidential campaign Mitt Romney was excoriated by Democrats for his holdings in the Cayman Islands. Now Jack Lew, Barack Obama’s nominee for treasury secretary, is under fire for once having an interest in a Cayman fund.
Getting rich people to pay their dues is an admirable ambition, but this attack is both hypocritical and misguided. It may be good populist politics, but leaders who want to make their countries work better should focus instead on cleaning up their own back yards and reforming their tax systems.
Dodgy of Delaware
The archetypal tax haven may be a palm-fringed island, but as our special report this week makes clear, there is nothing small about offshore finance. If you define a tax haven as a place that tries to attract non-resident funds by offering light regulation, low (or zero) taxation and secrecy, then the world has 50-60 such havens. These serve as domiciles for more than 2m companies and thousands of banks, funds and insurers. Nobody really knows how much money is stashed away: estimates vary from way below to way above $20 trillion.
Not all these havens are in sunny climes; indeed not all are technically offshore. Mr Obama likes to cite Ugland House, a building in the Cayman Islands that is officially home to 18,000 companies, as the epitome of a rigged system. But Ugland House is not a patch on Delaware (population 917,092), which is home to 945,000 companies, many of which are dodgy shells. Miami is a massive offshore banking centre, offering depositors from emerging markets the sort of protection from prying eyes that their home countries can no longer get away with. The City of London, which pioneered offshore currency trading in the 1950s, still specialises in helping non-residents get around the rules. British shell companies and limited-liability partnerships regularly crop up in criminal cases. London is no better than the Cayman Islands when it comes to controls against money laundering. Other European Union countries are global hubs for a different sort of tax avoidance: companies divert profits to brass-plate subsidiaries in low-tax Luxembourg, Ireland and the Netherlands.
Reform should thus focus on rich-world financial centres as well as Caribbean islands, and should distinguish between illegal activities (laundering and outright tax evasion) and legal ones (fancy accounting to avoid tax). The best weapon against illegal activities is transparency, which boils down to collecting more information and sharing it better. Thanks in large part to America’s FATCA, small offshore centres are handing over more data to their clients’ home countries—while America remains shamefully reluctant to share information with the Latin American countries whose citizens hold deposits in Miami. That must change. Everyone could do more to crack down on the use of nominee shareholders and directors to hide the provenance of money. And they should make sure that information about the true “beneficial” owners of companies is collected, kept up-to-date and made more readily available to investigators in cases of suspected wrongdoing. There are costs to openness, but they are outweighed by the benefits of shining light on the shady corners of finance.
Want more tax? Lower the tax rate
Transparency will also help curb the more aggressive forms of corporate tax avoidance. As Starbucks’s experience has shown, companies that shift money around to minimise their tax bills endanger their reputations. The more information consumers have about such dodges, the better.
Moral pressure is not the whole answer, though: consumers get bored with campaigns, and governments should not bash companies for trying to reduce their tax bills, if they do so legally. In the end, tax systems must be reformed. Governments need to make it harder for companies to use internal (“transfer”) pricing to avoid tax. Companies should be made to book activity where it actually takes place. Several federal economies, including America, already prevent companies from exploiting the differences between states’ rules. An international agreement along those lines is needed.
Governments also need to lower corporate tax rates. Tapping companies is inefficient: firms pass the burden on to others. Better to tax directly those who ultimately pay—whether owners of capital, workers or consumers. Nor do corporate taxes raise much money: barely more than 2% of GDP (8.5% of tax revenue) in America and 2.7% in Britain. Abolishing corporate tax would create its own problems, as it would encourage rich people to turn themselves into companies. But a lower rate on a broader base, combined with vigilance by the tax authorities, would be more efficient and would probably raise more revenue: America, whose companies face one of the rich world’s highest corporate-tax rates on their worldwide income, also has some of the most energetic tax-avoiders.
These reforms would not be easy. Governments that try to lower corporate tax rates will be accused of caving in to blackmailing capitalists. Financial centres and incorporation hubs, from the City of London to Delaware, will fight any attempt to tighten their rules. But if politicians really want to tax the missing $20 trillion, that’s where they should start.
Adam Creighton, The Australian, 20 February 2013
THE announcement of the election date is distracting the Gillard government from legislating up to 100 tax measures and the delay is weighing on business certainty, the Tax Institute says in its pre-budget submission to the Treasurer.
The tax think tank said a long list of tax changes, often made by government press release, had to be introduced into parliament in the few parliamentary sitting weeks that remained before the election.
The institute’s senior tax counsel, Robert Jeremenko, said: “The dwindling number of sitting days makes it even more pressing the government address these matters soon. The government is suddenly focusing on tightening up anti-avoidance measures and cracking down on transfer pricing in a scramble for revenue while leaving other longstanding issues unresolved.”
The bulk of the outstanding measures arose in the past few years but some go back as far as 2002. The institute, depressed by the pace of tax reform, is also calling for the establishment of a Tax Reform Commission, to keep the flame of the government’s 2009 Henry review alive and propose reform packages that government might find palatable.
“The work of such a body would feed directly into government decision-making processes,” it added.
The submission also recommended an expanded GST to provide state governments with extra revenue on the condition they undertook to abolish a raft of inefficient duties and levies. “Both levels of government need to work within COAG to build a tax system that creates greater autonomy for states through increased revenue generation from federal taxes,” it said.
The institute also called for the company tax rate to be cut to 25 per cent over time. “A 28 per cent rate would be a step in the right direction and Australians across the board will stand to share the benefits,” it said.
CONSUMERS ‘PAYING TWICE’ AS CARBON EMITTERS COMPENSATED
Simon Lauder and Sabra Lane, ABC News, 20 February 2013
Australia’s biggest carbon emitters are being accused of passing on the entire cost of the carbon tax while pocketing government compensation.
Analysis by consultants Carbon and Energy Markets suggests that brown coal power plants in Victoria’s Latrobe Valley could get billions of dollars in compensation over the next few years.
Director Bruce Mountain says some are passing on more than 100 per cent of the cost of the tax, meaning the government compensation amounts to windfall profits.
“It seemed to be more than 100 per cent for the case of some generators,” he said.
“Not terribly much more, but it was slightly more for some and close to 100 for others.”
The report says the brown coal power generators are set to reap between $2.3 billion and $5.4 billion profit from the compensation package.
The conclusion is based on wholesale spot prices for the first six months of the carbon tax, compared to pre-carbon tax prices.
But Mr Mountain says he cannot be certain about the conclusions because they are based on a number of assumptions about the future carbon price and its effect on generators.
The report was commissioned by not-for-profit green group Environment Victoria.
Campaigns director Mark Wakeham says consumers are paying while the Government props up the dirtiest form of electricity generation.
“It appears that households might be paying twice for the carbon price,” he said.
“They might be having the carbon price passed on to them by generators and retailers and are also paying in the form of tax transfers to the companies that own these power stations,” he said.
In September last year the Federal Government abandoned plans to pay some of Australia’s dirtiest power plants to shut down, saying the companies were asking for too much.
Mr Wakeham says this report shows why.
“It was never going to work, that you could pay them to stay open and pay them to close at the same time,” he said.
“We’re calling for the Federal Government to review the compensation payments to generators ahead of the federal budget and well ahead of the next scheduled payments on September 1, when more than $1 billion would be gifted to the owners of the most polluting power stations in the country – unless there is a review and a change to that status quo.”
The Federal Opposition’s environment spokesman, Greg Hunt, agrees with the report’s conclusion.
“This isn’t a tax which robs the rich to give to the poor. This is a tax which robs the poor to give to the rich,” he said.
But Climate Change and Industry Minister Greg Combet says the report’s findings are wrong.
“We simply don’t agree with this analysis. In fact, it’s partial and incomplete analysis, in the scrutiny we’ve been able to give it so far. We were only provided the report yesterday,” he said.
“The development of the carbon price package and the energy security fund from which payments for the generators are made – that was the result of years of work, including very careful modelling, including private sector agencies that are experts in energy market modelling.
“Some of the wholesale price outcomes that have been witnessed since the carbon price came into place by the Australian energy market operator simply don’t accord with the findings in this particular report.
“So we think there are errors in it.”
He says the Government’s analysis is based on energy market behaviour data that is available to experts in the field.
“Just because Environment Victoria, which is opposed to brown coal generation, puts out a report on the same day Senator Milne is at the Press Club doesn’t mean that the Government should be taking full account of a report that appears to be deficient in a number of respects,” he said.
Yasmin Alibhai Brown, The Independent, 17 Feb 2013
We now see hereditary peers as an anachronism, but refuse to see the same applies to the Royals
Last week Ed Miliband audaciously promised a mansion tax on homes worth over £2m and was rightly praised.
In the end though, he was too pusillanimous and timid to take the final, logical step, a palace tax. So the policy would make, say, the CEO of Marks & Spencer pay the tax on his home, but not the Queen who “resides” in eight or so palaces, or Prince Charles who occupies many fine abodes, and all those other princes and princesses and sundry living in royal mansions. Yes, mansions. Unlike the poor, the spoilt Royals won’t pay bedroom taxes either. OK, these opulent residences, even if properly taxed, would not swell the national revenues much. But it is the principle. Why should this clan be, and expect to be, excused from all laws trying to make the country fairer and more equitable? They could volunteer for inclusion, but they don’t, because they know their subjects, from left to right, the poorest and most wretched, to those with money and power, are happy to indulge and adore them. Which is why millions were generously spent on the Jubilee during the recession and the monarch showed off her diamonds in a special, and especially crass, exhibition. Punters queued up, paid up and gawped at the gems, a Queen’s best friends.
This in a country where last week, senior academics and children’s charities warned that child poverty was increasing rapidly and asked the government to urgently review its approach to this crisis. Week after week we hear of businesses collapsing and layoffs. The young, our future, have no jobs to go to or dream of. Suicide rates, especially among middle-aged men have risen by 15 per cent since 2007 and some experts link that to the recession. I see many more homeless people on our streets and hopelessness on the faces of people living in tough neighbourhoods.
Incredibly, in these hardest of times, the adulation and glorification of royals is reaching new heights or depths, more accurately. Last week, BBC Radio4’s Woman’s Hour – one of my favourite programmes – broadcast their list of the nation’s most powerful women. The Queen, who inherited her position and is apparently just a figurehead, came top. OK, she deserves some respect because she’s been around a long time, performed her duties and lived through some major historical changes. However, the judges simply endorsed their own, unexamined royalist sympathies and that of the BBC which rarely gives republicanism a fair hearing. The choice also exposes that the big Establishment lie that the monarch has no clout. She does, and uses it when necessary and without accountability. In January, we learnt that the Queen and Prince Charles were given powers to veto legislation 39 times and that she blocked parliament debating air strikes on Iraq. As for political neutrality, it’s a joke. These are natural-born old Tories with no empathy at all for the other parties.
The Audience, a new play by Peter Morgan, opens next month. It’s about the Queen and her “frank” views of her successive Prime Ministers and yes, she is played by Helen Mirren. Audiences will love it for sure, her royal self humbling elected and accountable leaders who worked and fought for their positions.
The population is so brainwashed now that they can’t think clearly and rationally about the institution or its dysfunctional family. It is, as the theatre director Richard Eyre says, a cult which denies “the light of reason”, an altar before which the people metaphorically cross themselves, “crook the neck… bend the spine, bob and curtsey”. More disheartening still is that the liberal intelligentsia, arty types, serious writers, even scientists, who claim to be smart atheists, succumb to this cult.
Recently, at Madame Tussauds, female visitors voted on the man they most fancy. George Clooney came first and Prince Harry second. And all because they believe the Kate and William fairy tale. More seriously ( and embarrassingly), the Princesses Beatrice and Eugenie, daughters of Prince Andrew, girls who wear funny hats, have been appointed British trade emissaries, now that Andrew himself has been grounded because of his dubious mates and dealings. Just why and how this decision was made, has not been explained. It’s that blue blood again. As the inimitable Will Self wrote in Prospect: “The monarchy infantilizes the public and squats like a fat toad atop the still-existent hierarchy of class in British society.”
That hideous tradition of obsequiousness has allowed the Royals to keep their financial affairs secret for too long. Now the Public Accounts Committee headed by the formidable Margaret Hodge is about to scrutinise their tax affairs. The Queen’s accounts will be audited for the first time and Prince Charles, who regards his Duchy of Cornwall (53,000 hectares) as his private, economic fiefdom, may pay more tax, maybe lose some valets and button his own shirts. Hodge is performing her public duty and honourably, though she is going where angels fear to tread.
Britons now understand that hereditary peers are an anachronism, but refuse to see the same applies to the state funded Royals. They won’t abandon their blind faith or imagine the alternatives. No system is forever. There is a better, fairer way to run a country. At least let yourself think about it.
Patrick Wintour, The Guardian, 17 February 2013
The Liberal Democrats are considering an assault on pensioners’ anomalous tax privileges by imposing national insurance on any earned income, and capital gains tax on property or assets sold at death.
The proposals are in addition to a mansion super tax that would cover all property assets including second homes. The ideas are set out in a policy consultation paper due to be put before the party’s spring conference next month.
The business secretary, Vince Cable, said, however, that proposals also contained in the party’s consultation for a net wealth tax, branded a “jewellery tax” by the Mail on Sunday, were “wacky” and “completely impractical” and would not be pursued.
Cable added he was prepared to see what form of mansion tax Labour was considering before deciding whether or not to back proposals Ed Miliband first aired last week.
Labour has said it will table a Commons motion on a mansion tax, after throwing the party’s weight behind such a measure last week. The issue is unlikely, however, to come to a vote in the Commons before the Eastleigh byelection on 28 February.
Cable said his party’s stance would depend on how Labour phrased the motion. “If it’s purely a statement of support to the principle of the mansion tax, I’m sure my colleagues would want to support it. But very often in these opposition days they can’t resist the temptation to make party political point scoring and dragging other issues in like the 10p rate. If that happens I’m sure we will not. It’s up to them to be statesmanlike and sensible in how they approach it.”
The Lib Dem consultation paper forms part of the party’s internal policy-making, and though the process is incomplete it will provide the Conservatives with ammunition in the Eastleigh byelection campaign as the Tories try to portray their coalition partners as a tax and spend party.
The paper is probably more significant in showing that the Lib Dems are still to finalise their plans for a mansion tax, asking whether it should be levied on property or the value of undeveloped land.
The paper says: “If successfully designed this would ensure taxpayers with multiple properties would be liable for a mansion tax on the cumulative value of their holdings above £2m.”
That would mean that those who have invested in buy-to-let property could be liable for the tax, even if none of their properties individually was worth more than £2m.
The reference to jewellery comes in a passage considering the virtues of a French-style net wealth tax that would require taxpayers to conduct a self-assessment of their net worth. The paper concludes this would be “difficult to administer”, and might have to include tax inspectors visiting homes to ascertain whether assets had been correctly valued.
The paper notes that a net wealth tax would target a similar group to a mansion tax, and overall seems unenthusiastic about the plan.
Speaking on Sky News, Cable was more blunt. “Taxing jewellery is completely impractical and intrusive … it’s wacky … these ideas are not party policy.”
The paper considers a wide range of revenue-raising measures, including:
• Restricting relief on pensions further from £40,000 to £30,000 and lowering the lifetime allowance from £1.25m to £1m.
• Capital gains tax on death. The paper says “CGT is forgiven at death and is not paid by the deceased’s estate. This creates a perverse situation whereby someone selling property prior to death must pay CGT but the exact same assets are not liable if disposed at death.”
It points out the independent Mirrlees review had recommended this relief from CGT be removed, which would raise £490m.
• A land value tax designed to dampen property prices, including a holding charge for owners of under-used sites.
• Council tax reform so that the upper band does more to differentiate between properties in the £320,000 to £100m price range.
• Imposing sunset clauses on all tax relief.
• Extending national insurance contributions (NICs) to benefits in kind, so clamping down on so-called salary sacrifice schemes.
• Introducing NICs on pensioners’ earned income, and extending the period during which gifts can be paid to reduce inheritance tax to 15 years.
The paper also considers raising the tax-free personal allowance to £12,000, the level of full-time work on the minimum wage.
It proposes measures to clamp down on the use of excessive debt to fund business growth by changing the treatment of interest payments, and restricting the ability of businesses to offset losses in previous years against profits in the current year to reduce their tax bill.
The consultation rejects raising the 45p income tax rate, saying the current structure of income tax is broadly progressive.
Oliver Wright, The Independent, 17 Feb 2013
Liberal Democrats will consider rebelling against the Government and voting with Labour in favour of a “mansion tax” if it is pushed to a vote in the House of Commons, the Business Secretary, Vince Cable, said today.
Ed Miliband announced last week that Labour would use an opposition debate in Parliament to push for a levy on homes worth more than £2m.
Today Mr Cable said that Lib Dems might back the move or abstain if Mr Miliband did not play “political games” on the issue, which he said was already a Lib Dem policy. “I’m glad they’ve seen sense,” he said. “I think the Labour Party are probably playing political games but nevertheless it’s welcome that they are endorsing it.”
Asked if the Lib Dems would accept Mr Miliband’s vote challenge, he said: “It depends entirely how they phrase it. If it is purely a statement of support for the principle of a mansion tax I’m sure my colleagues would want to support it.
“But very often in these opposition days they can’t resist the temptation to make party political point scoring and drag in other issues like the 10p rate and if that happens I am sure we will not. It is up to them to be statesmanlike and sensible.”
Mr Cable also dismissed suggestions that the party would bring holiday homes and buy-to-let landlords under the mansion tax or impose a wealth levy on possessions such as jewellery and paintings. The ideas were contained in working group paper planning for the party’s 2015 manifesto.
Max Newnham, The Sydney Morning Herald, 15 February 2013
WHENEVER decisions are made based on half-truths and political spin, which are often influenced by economic and ideological beliefs, mistakes will be made. Those who want to increase taxes on superannuation and impose arbitrary limits on benefits label the current system as overgenerous, but nothing could be further from the truth.
Thankfully, the results of research conducted by Mercer (Australia) were released this week that benchmarked the Australian retirement income system against that of eight other countries including the US, Britain and Canada.
In conducting the research, Mercer compared the types of retirement incomes provided by each country, the taxation of funded pensions and contribution caps. The final result of the survey, after applying the same facts and assumptions to each country, was a benchmarking of the nine different retirement systems.
The types of retirement income systems included government pension schemes, such as Australia’s age pension, and pensions provided by individuals. Included in the pensions provided by individuals were mandated systems, like our superannuation guarantee system, and voluntary systems.
When it comes to the taxation treatment of retirement systems, the generosity of Australia’s system can seriously be called into question. Australia is the only country that taxes employer and self-employed contributions, and it is also the only country where employees don’t receive a tax deduction for contributions.
Australia is also one of only three countries that taxes income earned by pension and superannuation funds. The other two are Denmark and Sweden. Australia is, however, one of only two countries that does not tax retirement income.
In addition to taxes levied on superannuation, a major influence on how much a person will have when they retire are the limits placed on contributions. In this instance, Australia firmly comes in last place.
The current concessional contribution cap of $25,000 is 34.6 per cent of average earnings. This compares with Denmark, which has no limits, Switzerland, which has a contribution cap of 255.2 per cent, and Sweden, which has a cap of 124.6 per cent of average earnings.
To measure the impact of the different tax systems, Mercer modelled the projected value of an employee’s superannuation on an average salary of $72,177, receiving the 9 per cent employer contribution, over a 40-year period. Mercer applied the same economic assumptions used by the OECD. These were an annual price inflation of 2.5 per cent, real earnings growth of 2 per cent and a real rate of investment return after costs of 3.5 per cent a year.
The results of this modelling resulted in Australia coming third last. After taking into account the various taxes levied on super for 40 years, an Australian ends up with $265,672. Coming in at No.1 is a resident of Britain with a retirement benefit of $309,206, followed by a Canadian with $298,329.
One of the main reasons Australia rates so badly is that our taxes are applied on contributions and super income. The only two countries that also tax income are Denmark and Sweden, which came last and second last in the benchmarking. In the other countries that were benchmarked, 100 per cent of contributions and investment income compounds. In Australia, because contributions and earning are reduced by taxes over a person’s working life, they end up with much less.
The Gillard government, as a result of this study, cannot justify increases in the taxation of superannuation because the tax rate has been overgenerous. This one-sided interpretation has nothing to do with facts and is all about an ideological view and trying to raise tax revenue.
Miles Godfrey, The Sydney Morning Herald, 14 Feb 2013
Federal politicians are again under pressure to scrap the GST on tampons, with thousands of people signing an online petition calling for the 10 per cent levy to be dropped.
Perth student Sophie Liley launched the petition on change.org on Tuesday and within 36 hours had gained 15,000 signatures of support from men and women.
Labor had campaigned to have GST on tampons scrapped in 2000.
In September 2001 the Senate passed a bill exempting the products, breast pumps, funeral services, and caravan park and boarding house rents from GST – but the changes were vetoed in the House of Representatives.
The latest “Axe the Tampon Tax” petition says most women will end up being taxed $1000 over their lifetime for sanitary products and calls on Prime Minister Julia Gillard and Opposition Leader Tony Abbott to make scrapping GST on tampons a key 2013 election pledge.
“It’s completely outrageous that women are forced to pay the GST on tampons because they’re labelled as ‘luxury’ items – particularly when condoms, lubricants, incontinence pads and sunscreen are GST free,” Ms Liley said.
“A government that charges women the GST as a direct consequence of their basic biology is a country that is fundamentally sexist.
“It sends the message that in this day and age, despite having our first female prime minister, we are okay with continued sexism in this country.”
The issue has also gained support on social media sites, with plenty of people posting Twitter messages linked to the petition, with the hashtag #bloodyoutrage.
The issue also arose in 2009 after supermarket chain Coles reduced the price of female hygiene products by 10 per cent to offset the GST.
Coles said at the time it was removing the equivalent cost of the tax because tampons should be treated the same as basic food, education and medical services.
But the government refused to budge, with the then assistant treasurer Nick Sherry commenting: “The government has made a commitment to maintain the existing GST arrangements.”
Laura Tingle and Katie Walsh, Australian Financial Review, 14 February 2013
Treasurer Wayne Swan has written to his counterparts in the powerful G20 Finance Ministers Group calling for a global action plan to be developed by June to counter international profit shifting and tax avoidance.
Mr Swan leaves Australia for Moscow tonight to attend the Group of 20 meeting, at which he will urge ¬ministers from the world’s largest economies to adopt a more aggressive approach to boosting economic growth and protecting jobs.
Domestically, the government recently named Google and Apple as companies it believes are using complex structures to shift profits to ¬lower-tax countries.
The Treasurer told The Australian Financial Review yesterday there was a “fair bit of momentum” around the world towards an agreement in Moscow to act on profit shifting, citing British Prime Minister David Cameron, Germany, France and US President Barack Obama, who recently noted “the empirical evidence suggests that income-shifting behaviour by multinational corporations is a significant concern that should be addressed through tax reform”.
Separately, tax experts applauded an updated version of tough new tax laws for paring back what were viewed as unworkable and extreme provisions on transfer pricing and tax avoidance.
The new bill was introduced in Parliament by Assistant Treasurer David Bradbury yesterday.
Fear of net tightening on big business
The original bills included unlimited power for the Australian Taxation Office to hypothetically re-craft global transactions to fight transfer pricing. It included a confusing assessment of the so-called “non-tax benefits” of a business deal.
Under the new version, the Tax Office can re-craft transactions only in exceptional circumstances and assess the commercial outcome of a deal to determine whether it could have been done in another, higher taxing, way.
Despite welcoming the improvements, experts were critical of the overall effect of the laws, which will tighten the net on big business.
In his letter to G20 ministers, Mr Swan said they would be meeting at a time when there were reasons for “tentative optimism” on the global economy but that “reforms that will support jobs and growth” still remained “the most pressing challenge”. But he said moving “to enhance the sustainability and integrity of the global tax system” was one of several other challenges.
“International tax standards around the world need to be robust and effective in the context of a global economy operating in a digital age,” Mr Swan said. “This changing environment has allowed some corporations to institute practices that allow them to avoid tax. In doing so, they leave all the heavy lifting to the vast bulk of companies and individuals who do the right thing.
“While each country can do much to ensure the integrity of their own tax systems, we must step up our efforts to work together to ensure international tax standards keep pace with the changing nature of global commerce.”
Swan highlights need for global action
Mr Swan said an OECD report, Addressing Base Erosion and Profit Shifting, published on Tuesday, made substantial progress “in identifying the root causes that facilitate this activity” but also highlighted the need for global action.
“We must progress the recommendation to develop a comprehensive global action plan by June this year,” he said. “A comprehensive approach is needed with a realistic, multilateral and well-prioritised action plan that builds and maintains momentum for fundamental reform of international tax arrangements.”
The OECD report says the consequences of a failure of countries to collaborate on tax “could be damaging [including] a battle to be the first to grab taxable income through purported anti-avoidance measures, or a race to the bottom with respect to corporate income taxes”.
“While these . . . strategies may be technically legal . . . the overall effect . . . is to erode the corporate tax base of many countries,” the report says.
“It may be very difficult for any single country, acting alone, to effectively combat [base erosion and profit shifting] behaviours.”
BDO partner Mark Molesworth said that one nation acting alone could not solve the problem – including Australia. “The difficulty faced by tax authorities around the world is that 19th-century tax concepts do not apply easily to the digital 21st century economy,” Mr Molesworth said.
Draft transfer pricing bill warning
“Although the Assistant Treasurer has previously named various taxpayers as not paying sufficient Australian tax, until broad agreement is reached amongst nations about how the profits of such enterprises are to be taxed, no one jurisdiction will be able to solve the issue.”
KPMG partner Anthony Seve said the draft transfer pricing bill introduced by Mr Bradbury was an improvement on earlier versions, but the measures would still increase pressure on taxpayers to back up their global transactions with more extensive documentation.
“The rules are quite tough and they will require quite a deep analysis to support taxpayers’ positions,” Mr Seve said. “There are still significant potential powers [for the ATO].”
PwC partner Michael Bersten said the latest draft was a huge improvement on the first, circulated towards the end of last year.
Elizabeth Knight and Philip Wen, The Sydney Morning Herald, 13 February 2013
“The record stands for itself” … Andrew Forrest says his protestations against the Gillard government’s minerals resource rent tax have been vindicated. Photo: Megan Lewis
MINING companies Rio Tinto and BHP Billiton have built up a combined arsenal of $1.7 billion in tax credits that can be offset against future mining tax liabilities.
And billionaire miner Andrew Forrest confirmed to Fairfax Media that his iron ore company, Fortescue Metals, would not be paying any tax under the Gillard government’s minerals resource rent tax this year.
Mr Forrest, who challenged Treasurer Wayne Swan’s claim that the tax would still raise billions in revenue for the government after being watered down during negotiations with Rio, BHP and Xstrata, appears to have been vindicated after Mr Swan’s admission that the tax has net a paltry $126 million in the six months to December 31.
While the focus has been on the dramatic shortfall in mining tax collections compared to original Treasury projections of more than $10 billion over four years, the most recent financial accounts of Rio Tinto and BHP Billiton show the two miners have built up $1.1 billion and $637 million in tax credits respectively.
The credits did not reduce the amount of company income tax they had to pay, but can be carried forward to offset future mining tax liabilities.
Tax specialists say the credits have been built up through the mining tax’s ”starting base allowance”, which has been criticised by some as being too generous for miners.
These offset amounts will be whittled down over time as the companies apply these amounts against MRRT liabilities. How long the credits will last depends on commodity price movements and profits in years to come.
Mining giant Rio Tinto is expected to post a full-year net profit of more than $9 billion on Thursday, driven by the company’s iron ore business. But the result will be affected by the $US14 billion of write-downs of its aluminium and coal assets it announced before replacing its chief executive Tom Albanese last month.
Mr Forrest’s recent MRRT brawl with the government has seen him subjected to criticism from Mr Swan – part of which was his inclusion in the ”badly behaving billionaires” club that included Clive Palmer and Gina Rinehart. Sources have said that Mr Swan included Mr Forrest as a member of the billionaires in an essay in The Monthly – against the urging of his advisers.
Mr Forrest has said he held meetings with Mr Swan arguing against the MRRT when it was proposed but was told: ”If you don’t like the tax you [WA] can secede”.
Mr Forrest’s record shows he also met the crossbenchers.
While Mr Swan has admitted that tax receipts from the tax in the current year are minimal there is no updated guidance on whether this will improve next year or when it might begin to attract revenue. Mr Swan says the poor result is due to the softening in iron ore and coal commodity prices but many now agree with Mr Forrest’s views that the structure of the tax has been its crucial downfall.
Ultimately the super profits from mining companies will be subjected to tax, but for the first couple of years at least these will be shielded by inserting an ability to include deductions on the revalued assets in their iron ore and coal portfolios.
The major mining companies are loath to talk about the tax that they negotiated with the Prime Minister, Julia Gillard, and Mr Swan. They have kept their heads below the parapet this week as Mr Swan has been in the firing line.
The government has responded to the attack by suggesting various changes to the tax but the prospect of a big overhaul before the election is unlikely. The campaign by BHP, Rio and Xstrata that led to the super profits tax being replaced with the more benign MRRT was so potent that Ms Gillard will not take them on again over the next seven months.
Over the next few weeks BHP Billiton and Rio Tinto will release their full-year earnings but there is no guarantee
Ben Eltham, NewMatilda.com, 7 February 2013
Will Labor and the Coalition offer exactly the same deal to voters? On superannuation policy, at least, there are key differences. Ben Eltham on how your retirement prospects fared this week
Don’t tell anyone, but for a brief moment this week we managed to have a debate about superannuation policy.
If you’re like me, you don’t have much super. After freelancing on low wages for most of my life, my super balance is about $11,000. If I am lucky enough to live until retirement — a fuzzy boundary for the working writer — I will, on current projections, have to rely on the age pension.
That’s assuming Australia still has one in 30 years. Our aging population means that by the middle of the century, working-aged Australians will constitute a far smaller proportion of the population than they do now.
Because superannuation touches so many people, including wealthy and powerful people, super policy is always a hot political issue. The current debate about super sees the Coalition pledging to abandon super contribution tax breaks for low income earners, while Labor gears up for some “structural savings” with mooted plans to raise tax rates on high income earners. The differences in superannuation policy are shaping as a key difference between the two major parties in the run up to September’s election.
In budgetary terms, super is expensive. The various tax breaks and concessions associated with the compulsory savings scheme cost the federal budget an estimated $32 billion this year, and are rising rapidly. We are approaching a time when the government will spend more on tax breaks for super than it spends on the age pension.
The Hawke-Keating government set up superannuation in the mid-1980s, originally as part of a bargain with the union movement regarding wage rises (the so-called “Accord”). Beginning at 3 per cent, compulsory super gradually rose to 9 per cent by the early 1990s, and the current government plans to raise it to 12 per cent by the end of this decade.
The aim was to get Australians to save more for their retirements. To do this, the government created a system in which workers’ pay was garnished and sequestered in a fund they couldn’t access until they retired. The massive new pool of money the policy created was then gifted to the finance industry, which charged workers a handy fee for the privilege of managing their money.
Despite the rocket science of modern investment theory, returns have been modest. After fees and inflation, super returns have averaged around 4 per cent over the past three decades. But over significant periods, returns have been lower than that. After the carnage on world markets in 2007 and 2008, it took almost five years for most super funds to return to their pre-GFC peak.
This report by ABC economics correspondent Stephen Long quotes figures from industry researcher SuperRatings, which put average retail super fund returns at only 3.7 per cent in the decade between March 2000 and February 2010. Cash in the bank would have done better. (Returns in recent years have been better; SuperRatings says typical returns over the past decade to December 2012 has been 6.4 per cent). The risks of financial market implosion have led some, such as Long and heterodox economist Bill Mitchell, to argue that super is a waste of money.
Judged against its goal of increasing national savings, superannuation has been a qualified success. Australia’s domestic savings are quite high compared to similar industrialised nations with deregulated banking systems like the US, UK and New Zealand.
According to respected Treasury economist David Gruen, “the compulsory system appears to have made a significant contribution to national saving — estimated currently at about 1.5 per cent of GDP, and rising to close to 3 per cent over the next few decades.”
Unfortunately, the benefits of superannuation come with negative trade-offs. I’ll mention three.
Firstly, the massive fees that accrue to super fund managers, particularly retail super fund managers. Because these fees are collected before returns are paid, they act like a private rent on retirement savings — a rent paid by workers to banks and big financial institutions. It’s hard to see how these fees are justified, when in many cases savers could do better with risk-free portfolios of sovereign bonds, or even cold hard cash in the bank.
Secondly, because successive governments have decided to make super a tax effective way of saving, there are some very large costs built into Australia’s federal budget associated with super tax concessions. These tax breaks accrue disproportionately to the better off. The tax treatment of super makes it particularly unequal.
It works like this. High income earners with big superannuation balances get taxed on their super contributions at the same rate — 15 per cent — as middle- and low income earners. At the extreme end of the scale, a multi-millionaire with a huge self-managed super fund is paying a tax on that super at a far lower rate than the marginal tax rates he or she pays on ordinary earnings. So super acts like a kind of tax haven, enabling wealthy wage earners to park significant parts of their income in a special low tax vehicle. A wage earner on the top personal income tax rate enjoys a tax break of 30 points (15 per cent compared to 45 per cent).
In contrast, before recent changes introduced by Labor, a low income earner paid the same 15 per cent on their super contributions as they paid in normal income tax. They received no tax break. This was why Wayne Swan moved to give low income earners a special tax break on their super in last year’s budget, reducing their super tax rate to zero. Interestingly, this is the very break that the Coalition apparently plans to remove should it win office.
Thirdly, super has a gender problem. This is because women still earn lower wages than men in many industries, and often spend many years out of the workforce raising children. As a result, their super contributions are lower. Super balances across the country are higher on average for men — noticeably higher. According to the Australian Bureau of Statistics, in June 2010, the mean aggregate balance (pdf) of personal super was $71,645 for men and $40,475 for women. There is no policy proposal currently on the table to address this imbalance.
The current proposals mooted by the major parties will tinker with super around the edges, much as successive governments have continuously tweaked the super rules since its inception. Labor is mainly looking for savings — big savings — that it can plough into its so-far unfunded disability and schools reforms. In contrast, the Coalition will seek to entrench the inequality in the current system, probably by accusing Labor of class warfare.
In doing so, it will almost certainly have the bulk of the business media on its side. After all, who has the big balances? It’s amazing how people who should know better, like economics commentator Alan Kohler, can suddenly take up the class war cudgels when their own healthy super balances look like attracting an extra tax.
Kohler has one thing right, though: the superannuation industry is extraordinarily powerful, and will likely campaign strongly against any changes. “If they thought the mining companies’ campaign against the original RSPT was a big deal, wait ‘til they see what the superannuation industry will hit them with if they propose an increase in super taxes,” he wrote yesterday, and its hard to disagree. An insightful recent report from The Australia Institute ranks super as one of the four most influential industries (pdf) in the country, and the scale of the tax concessions super enjoys testifies to that.
But financial planners and the super industry may also be underestimating the determination of this Labor government to find the money it needs to fund its election promises. If Labor can’t find structural savings to fund Gonski and the NDIS, it will have precious little to campaign on come September.
David Crowe, The Australian, 6 February 2013
JULIA Gillard has ruled out a new tax on payments from superannuation funds by repeating a 2010 vow that Labor would “never” remove the tax-free benefits for the over 60s.
The Prime Minister repeated the promise as she faced a challenge in parliament over the government’s search for billions of dollars in savings by cracking down on superannuation tax breaks.
Ms Gillard’s vow counters a report in The Australian Financial Review on January 31 that said the government was considering an end to the tax-free status of superannuation for people with very large amounts in their super funds.
The AFR said the option being considered was to tax withdrawals from very high fund balances.
Sources close to Superannuation Minister Bill Shorten confirmed after Question Time that a withdrawals tax was “not an issue” despite days of speculation about a new hit to funds owned by the wealthiest Australians.
While The Australian understands that several tax breaks are under review, the Prime Minister’s comment makes it clear that the government will not impose a new tax on the lump sums, pensions or other distributions that people take out of their funds once they reach retirement age.
Ms Gillard told Nationals leader Warren Truss that he should remember the 2010 commitment made when the government responded to the Henry tax review.
“I refer him to the media release that accompanied that report that said the government reaffirms that it will never remove tax-free superannuation payments for the over-60s,” Ms Gillard said.
The assurance was made in May 2010 when Wayne Swan explicitly rejected many of the recommendations in the Henry tax review and insisted that the tax-free status of super withdrawals was not on the agenda.
Former Treasurer Peter Costello introduced the tax-free rules in 2006 but it is only one of several tax breaks on retirement incomes.
People with superannuation funds also benefit from tax breaks at two other stages, with a 15 per cent concessional tax rates on the contributions they make to the fund and a 15 per cent concessional tax rate on the fund’s earnings. Both taxes are lower than income tax rates for most people.
“The government has made it clear that it is standing by the promise we made about super withdrawals when we released the tax review in 2010,” said a government source.
“There’s been plenty of kite-flying and rumour but a withdrawal tax is not an issue.”
The Australian understands that changes to earnings tax and contributions tax remain under consideration given the scale of the $32 billion in tax concessions made under the current rules.
There is no tax concession measured on the tax-free status of super distributions since it is not measured by the Australian Tax Office or Treasury.
Michael Janda, ABC The Drum, 1 February 2013
Stamp duty has long been the bane of first home buyers, but could the writing finally be on the wall? Michael Janda takes a closer look at the archaic, inefficient and onerous tax, and explains why it needs to go.
Sometimes the smallest governments can spark the biggest national reforms, and virtually all economists are hoping that the ACT is doing just that with its plan to abolish stamp duty.
For those not familiar with the plan, the ACT is proposing to phase out stamp duty gradually over the next 20 years, replacing the lost revenue with an increase in general rates, effectively a land tax.
Almost all economists are cheering the move – if it survives through to completion – with stamp duty rated by the profession as one of the most inefficient revenue-raising measures, and land tax one of the best.
It will not just be economists cheering, with stamp duty currently one of the biggest upfront costs acting as a barrier to people buying their first home or needing to move. One study by a prominent housing economist found it makes up almost a quarter of the average upfront costs faced by first home buyers (with the deposit, moving and legal costs among the other major imposts).
The difference between stamp duty and these other costs is that it is easily avoidable – if state governments have the stomach for genuine tax reform.
An archaic tax
Stamp duty is an archaic tax, an historical vestige from a bygone era where governments had little knowledge or control of vast areas of their realm.
Back in the early 19th century, the need to have many documents officially stamped to make them legally binding (such as property transfers) offered the best opportunity for a government to levy its taxes and minimise tax evasion.
However, for well over a century, Australian states have had comprehensive property registers under the Torrens Title system, meaning governments know who owns what property at any point in time, making a land tax easy to administer.
Yet, despite land taxes (and council rates, which are also land taxes) being in place in many states for a long period of time, stamp duty still persists as the principal way to raise revenue from real estate.
This surely has to be a function of laziness about the hassle of changing to a different tax system, as well as the irrational fear that the phrase ‘land tax’ generates, even if it were expanded just to replace the revenue forgone by eliminating stamp duties.
Unlike stamp duties, which are partially hidden among the raft of other costs associated with buying a home, land tax comes in a separate bill – an annual reminder of money paid to the government. And it is called a ‘tax’.
Other than these superficial political and branding issues around property taxation, there is no economic logic to retaining stamp duties over a broad-based land tax.
From a home purchaser’s perspective, stamp duty comes at the worst possible time, on top of a raft of other costs – the deposit for the home, the legal costs of conveyancing, removals, the purchase of necessary household goods, and bank fees.
First home buyers must save that extra money – often more than $20,000 – before they can enter the market, and many may effectively borrow the stamp duty by taking out a bigger mortgage from the bank than they would have if they had not had to pay the duty.
A land tax, like stamp duty, will tend to reduce the price of a property because it gets factored into a purchaser’s decision about how much to pay (just like strata levies or council rates) but, unlike stamp duty, it is not payable upfront.
Replacing stamp duty with a land tax can almost be seen as a loan from the government to home buyers – it still gets its tax, but spread out over time, not upfront.
From a government perspective – other than perhaps politically – land tax is also a no-brainer over the long-run. Once any transition period is over, a land tax designed to replace stamp duty should raise just as much revenue, but it will do so far more consistently.
That is because land tax revenue fluctuates with property values, while stamp duties fluctuate with values and transaction volumes, which can be highly volatile.
The Henry Tax Review cited the example of sales of established homes in Sydney, which plunged 19 per cent between 2007 and 2008. In response, stamp duty raised by the NSW Government fell more than 30 per cent, from $3.94 billion in 2007-08 to just $2.74 billion the next financial year, an instant $1.2 billion budget black hole.
In contrast, land tax revenues only fluctuate with the value of land, which tends to be more stable, and also rise over time with increasing wages and population.
However, it is the economic inefficiencies that stamp duty generates, and the status of land tax as one of the most efficient taxes, that has most economists supporting a shift.
The biggest problem with stamp duties is that they are transactional, and therefore avoidable by not buying or selling property.
Economic logic, and several studies, have confirmed that stamp duties do act as a significant deterrent against people changing homes. This leads to a sub-optimal allocation of the nation’s housing stock – i.e. people stay in homes that are too small or too big, or in an inconvenient location, simply because it would cost them so much money to move.
This tendency for home owners to stay put also helps partially explain Australia’s relatively large average home sizes (Australian households have amongst the most floor space per person of homes anywhere in the world).
That is both because older residents are continuing to take up much of the larger housing stock due to the financial disincentive against downsizing, and also because younger purchasers will tend to buy a property that is bigger than their current needs to avoid having to buy another in the near future as their family grows.
The same effect also means that Australia’s workforce becomes less mobile, as people have a strong financial disincentive against moving to take up a job, or a better job.
The lack of mobility is a factor in pushing up labour costs disproportionately in boom areas and unemployment in those locations stuck in economic downturns. It also means people are less likely to shift homes within the same city after taking up a new job in a different area, thereby increasing the average commute.
Workers who have to move frequently are either financially discriminated against by paying more tax in stamp duties, or forced to remain as renters because the duties would be prohibitive.
Under Australia’s tax system, people who spend their whole lives renting end up missing out on the benefits of home ownership, such as tax-free capital gains.
With so little going for them, stamp duties are surviving on the inertia of politicians for whom change equals potential threat.
The ACT model presents one way around the potential shock of change, which is to phase the stamp duty reductions and rate increases in so gradually as to avoid any sudden jolt to the property market.
The Henry Tax Review suggested a more novel approach to transition which might also address some of the political concerns of people who have already paid stamp duty on their current property. That would be to restrict the new land tax to properties changing hands after a particular introduction date, so that those who already paid stamp duty are not taxed twice.
This proposal goes a step further and suggests that buyers of properties after this date could be offered a choice: either pay stamp duty up front, or agree to pay land tax into the future at a rate set that would roughly equal the stamp duty they would have had to pay plus inflation.
Once a property had switched onto land tax, however, it could not switch back onto stamp duty the next time it was sold. Gradually, almost all of the housing stock would move onto land tax, at which time, decades hence, another transition arrangement could be made for the few properties left that were not yet covered by land tax.
The government might lose some upfront revenue in the short-term, but in return would receive a much more stable long-term source of income. First time buyers would be no worse off, because the land tax was simply replacing the amount of stamp duty they would have had to pay, and they may be better off, because the lower upfront costs mean they may need to borrow less money from the bank, and therefore have lower total interest repayments.
The only other common objection to land tax is that asset-rich but low-income home owners may be forced from their homes by their tax bill. However, it would be very simple for state governments to allow such people to defer their land tax payments, which would be indexed at a suitable rate and only fall due when the property next changed hands. Thus the land tax bill could be automatically deducted from the sale proceeds of the property when it was eventually sold.
As with any tax reform, a major change is daunting. However, the switch from stamp duties to land tax would be far less radical and disruptive than the move from sales taxes to the GST, and the economic efficiency benefits of moving to land taxes from stamp duties is far greater than those from the shift to a consumption tax.
In fact, land taxes are not only better than transfer duties, they are also far more efficient than consumption, investment or income taxes, because the amount of land available does not change in response to a tax change – there is a fixed amount, so only the value of the land changes.
The Henry Review cited an OECD report which found that a 1 per cent switch away from income taxes to a land tax would improve long-run economic growth per capita by 2.5 per cent.
That is not to say a modern government could or should raise all its revenue from land taxes, with equity considerations also dictating that other stores and manifestations of high income and wealth should be taxed.
However, there is a general consensus among economists that land tax should be a bigger part of the mix and stamp duties finally relegated to history, where they belong.
Bonnie Kavoussi, The Huffington Post, 28 February 2013
Small-government advocates often claim that high taxes hold the economy back. But a new report finds that states without a personal income tax have experienced slower economic growth than states with high income tax rates.
The report, from the Institute on Taxation and Economic Policy, found that between 2002 and 2011, the economies of the nine U.S. states without a personal income tax grew 37 percent less quickly per capita than states with high income taxes.
That may be inconvenient news for several Republican governors, who have recently proposed cutting or eliminating the personal income tax in their states. Louisiana and North Carolina have proposed ending their state’s income taxes, and Oklahoma and Kansas are considering cutting theirs.
Louisiana Gov. Bobby Jindal (R) said in January that abolishing the state income tax would “make Louisiana more attractive to companies who want to invest here and create jobs.” And Republican leaders, from House Speaker John Boehner to Senate Minority Leader Mitch McConnell, have claimed that raising income tax rates would hurt the economy.
DAVID BRADBURY, AUSTRALIAN FINANCIAL REVIEW, 22 FEBRUARY 2013
Nothing is more fundamental to a nation state’s sovereignty than its right to tax, but that right is under threat from profit shifting and international tax avoidance.
Working out how to protect the taxation base in the age of digital disruption looms as the most significant challenge to the world’s major advanced economies and was raised by the Treasurer at the G20 meeting last weekend.
Put simply, the international rules that govern taxation have passed their use-by date. Designed for the industrial era, the tax rules have failed to keep pace with the rapid changes in global commerce.
In the knowledge economy profits are increasingly attributed to the creation and use of intangibles assets, like intellectual property, marketing and licensing rights. Often, these highly-mobile intangible assets are located in low or no tax jurisdictions. Many of these strategies were pioneered by the tech sector, whose business models have exposed particular vulnerabilities in the international tax rules. We are now seeing traditional sectors of the economy emulating these strategies, loading up the profits for tangible commodities into their intangible components, like brand names and research. All of this is designed to make profits a moving tax target, supported by complex transactions that exploit differences in domestic and international tax rules to reduce tax around the world.
In its most recent report, the OECD highlights the essential structural problem: today multinational enterprises can be heavily involved in the economic life of a country through the internet without having a taxable presence in that jurisdiction.
Australia is not alone in confronting these issues. As confirmed at the G20 meeting, jurisdictions around the world are locked in a battle to stop multinational enterprises from shifting their profits offshore to avoid paying their fair share of tax.
Governments are constantly moving to close the loopholes and rorts that enterprises exploit to shift profits, but there are other countries whose tax arrangements are so concessional that they are simply havens for the world’s serial tax avoiders and aggressive tax minimisers. This is a race to the bottom that only serves to strip global taxation revenues and erode the living standards of hundreds of millions of people.
This is why we need international cooperation of the kind we saw at the G20 last weekend.
It is not enough for our corporate citizens to hide behind platitudes. Yes, they create jobs and economic activity, but that should never be a trade-off for paying their fair share of tax.
Where multinational enterprises enjoy the benefits of the stable regulatory environment, infrastructure and human capital of their host country but do not pay their fair share, domestic companies are at a competitive disadvantage.
I will never accept the proposition that in the future Australian families and small businesses should shoulder more of the tax burden in the absence of a fair contribution from multinational enterprises that go to extraordinary lengths to ensure their tax obligations are next to nothing.
What signal does it send to individual taxpayers, who operate in a system of voluntary compliance, that ‘shopping around’ for ways to avoid paying tax is acceptable?
I am not trying to tar all multinational enterprises with the same brush, but this is also part of the problem – we simply do not know which taxpayers and which sectors are paying their fair share.
Some have taken the bold step of outing themselves. Others just quietly decline to refute the claims made about the tax that they pay.
This should not be a guessing game. This Government will be progressing reforms to improve transparency around how much tax large enterprises are paying.
Transparency in taxation would go a long way to improving not only government’s understanding of which taxpayers are pulling their weight, but it would give the community the capacity to engage in an informed debate.
Put simply, there is a strong community expectation that the most profitable companies pay their fair share.
This is a principle that most should find difficult to argue with. Some in business reject the notion that paying a fair share of tax forms part of a broader social compact, instead believing that it is just another cost of doing business.
On this point, I vehemently disagree.
The Government will not take a backward step in making sure that we tackle the challenge of base erosion so that we continue to have a tax system that is fair to all Australians.
Colin Brinsden, The Sydney Morning Herald, 15 February 2013
CANBERRA, Feb 15 AAP – The developed countries’ club is urging Australia to cut its corporate tax rate and increase the rate of the GST and broaden its base.
The Organisation for Economic Co-operation and Development (OECD) says Australia’s 30 per cent company tax rate is comparatively high for a capital-importing country.
In its “Going for Growth 2013″ report released at the G20 Finance Ministers Meeting in Moscow on Friday, the OECD says to offset revenue losses from a reduced company tax rate, other business taxes and the consumption tax should be increased.
The goods and services tax has remained at 10 per cent since it was introduced in 2000, and it does not apply to fresh food, health and education products.
Previous calls to alter the GST were rejected by both federal Labor and the coalition.
An attempt by the federal government to cut the corporate tax rate last year was thwarted by the coalition because it was to be funded by Labor’s controversial mining tax.
The coalition has vowed to scrap the mining tax if it wins this year’s election.
In its recommendations, the Paris-based OECD also said cuts to subsidies to the automotive sector and irrigation infrastructure should be considered.
It says over the past decade, Australia’s per capita income grew strongly, helped by high terms of trade and employment rates.
“As a result, it has significantly surpassed the average of the most advanced OECD countries,” it says in the Australian chapter of the 294-page report.
“Sustaining past trend growth of living standards would be helped by improving the long-term drivers of productivity, such as the tax system, infrastructure and innovation policy.”
It recommends Australia relax barriers to foreign direct investment, saying its screening procedures are comparatively stringent.
User and congestion charges in transport should be expanded.
Other key priorities include reforming childcare support to better account for the higher costs of pre-primary education, given enrolment rates are lower in Australia than other OECD countries.
This would help lift female employment and improve equality opportunities.
It also recommends introducing new measures to boost business research
Sally Patten and Jacob Greber, Australian Financial Review, 1 February 2013
Taxing superannuation payouts for individuals with $1 million in retirement savings would hit self-funded retirees on modest incomes, wealth industry executives claim.
The Gillard government is considering plans to end the tax-free status for super withdrawals and may start taxing payouts on accounts with about $1 million, The Australian Financial Review reported on Thursday. Industry executives pointed out that, assuming a 5 per cent rate of return, a balance of $1 million would provide an annual income of $50,000.
“That is a very modest amount unless you have income from other sources,” said Financial Planning Association chief Mark Rantall.
“One million dollars is too low. One million in the scheme of things is not huge,” said Pauline Vamos, chief executive of the Association of Superannuation Funds of Australia, adding that as the population aged, individuals would need more money to fund their retirement. Furthermore, they would need to finance rising health and aged care costs.
“Their capital has to last not 10 years, but 40 years,” Ms Vamos said.
Actuarial firm Rice Warner calculated that a 30-year-old on an income of $120,000 who had accumulated $30,000 of super savings could hope to accumulate $1 million at age 53, assuming they contributed 12 per cent of their salary into super and received annual pay rises of 3.5 per cent. Noting that more than 100,000 self-managed super fund members had balances of $1 million or more, Mr Rantall said that group of savers was being unfairly targeted.
“By definition, a large proportion of SMSFs are going to be captured,” he said.
Super industry executives expressed their concerns as Treasury analysis revealed that the nation’s top 5 per cent of taxpayers would garner more than 20 per cent of tax breaks for superannuation contributions.
The research also showed individuals earning between $80,000 and $180,000 would claim a rising share of the $32 billion foregone this year in concessions.
Treasury’s analysis is understood to have been released by the department ahead of a fresh super industry round table with the government. It shows the nation’s top 10 per cent of taxpayers benefited in 2009-10 from 38.2 per cent of total concessions for both contributions to and earnings within superannuation funds.
Separate figures based on contributions only show middle- to upper-income earners will this year receive 38.5 per cent of concessions, up from 31.6 per cent in 2007-08.
The top 1 per cent will get 5.3 per cent of concessions this year.
Ms Vamos said that if the government was concerned that individuals were using Australia’s $1.4 trillion super system as a tax avoidance vehicle, the threshold should be far higher.
“One million dollars does not smack of tax avoidance. [A tax on payouts] is a legitimate question for very high balances, in the tens of millions of dollars,” she said.
Other industry groups were aghast at speculation the government might tax super benefits.
“It is a retrogade step . . . if this comes in, an awful lot of people will be affected,” said Duncan Fairweather, chief executive of the Self Managed Superannuation Fund Owners Alliance, which represents trustees of do-it-yourself schemes. He estimates 29 per cent of self-managed funds have balances of more than $1 million.
John Brogden, chief executive of the Financial Services Council, said any changes would undermine confidence in Australia’s $1.5 trillion super system, adding that people would look at other ways to save money.
“The entire reason to create compulsory superannuation is to ensure that as many Australians as possible become self-funded retirees,” Mr Brogden said. “The message here is: don’t put too much into super because you might get taxed. Where does it start and where does it end?
“This is another demonstration of super being used as a cash cow to solve short-term budget problems.”
A spokesman for Treasurer Wayne Swan said Labor had invented superannuation and had demonstrated in the past that it was willing to make the system stronger and fairer.
Superannuation concessions are likely to become the single-biggest source of foregone taxes for the government this year, behind the capital gains and negative gearing tax breaks for housing.
Over the next four years super concessions could potentially cost taxpayers more than $150 billion, Treasury said, although it warned that those figures may not reflect potential behavioural changes caused by any policy shifts.
Treasury secretary Martin Parkinson has sought to escalate public debate over the past year about the cost of superannuation concessions amid increasing concern about the long-term viability of the federal budget.
Financial demands on the government are expected to rise sharply in coming years following the introduction of the National Disability Insurance Scheme, which is likely to cost at least $8 billion in first full year of operation, as well as the proposed Gonski education reforms.
Prime Minister Julia Gillard this week pitched her election campaign on the need to make structural savings to fund big-ticket programs.
Tim Lyons, assistant secretary of the ACTU and a trustee of HESTA, a super fund that caters to workers in the health sector, said the current system was “deeply inequitable” and that the government needed to make the super system sustainable and fair.
“We think the top end concessions are far too generous. People are getting enormous payouts and paying no tax,” he said.
Mr Lyons urged the government to review the tax-free status of payouts together with the level of contributions and earnings taxes.
“We risk making further mistakes if we don’t look at the way super is taxed as a whole,” he said.
Andrea Slattery, chief of the SMSF Professionals’ Association, said the proposal to tax super payouts was “not an equity issue but a budget issue”.
She said: “We do not believe that this is an appropriate measure for the super sector. Increasing the opportunites for people to contribute to super is a much better way to go.”
Fiona Reynolds, chief executive of the Australian Institute of Superannuation Trustees, said the government and Treasury needed to model an upper limit.
“It should be a high limit, but there must be a limit [on how much you can take tax free],” she said.
Ms Reynolds said that any move to tax super payouts should be done in conjunction with policies to ensure the sustainability of the super system by limiting the amount of money retirees can withdraw in a lump sum.
“The sustainability of the system should be part of the policy thinking. The debate should include starting to incentivise people to take income streams over lump sums,” she said.
Nearly 90,000 Australians had more than $1 million in their super accounts in 2010, controlling assets worth $155 billion, according to ASFA. A further 42,000 had between $800,000 and $900,000.