Tax reform - what are the options?

Within an hour of the recent leadership spill in Canberra, Malcolm Turnbull stressed the need of economic leadership and the importance of taking a clear and lucid case for economic reform to the Australian people.

It shouldn't come as any surprise, therefore, that one of the first stories of substance in the days after Malcolm Turnbull came to power was Assistant Treasurer Joshua Frydenberg suggesting that Mr Turnbull may take a GST hike to the next election.

Raising the GST

While raising the GST might appear to be a drastic move for any new Prime Minister, there real and rational reasons why this might just happen. With a slowing economy overall, the main areas left growing also happen to be those areas that are exempt from the GST – such as food, health and education. Hard consumption on the other hand is declining which means the GST is actually a declining revenue source.

Mr Turnbull is opening the conversation, it seems, to say if the people want to keep the current GST exemptions, the tax needs to be raised on those part of the where it already applies. The alternative is of course to widen the GST base which would be even more unpalatable.

Australia's position internationally also presents a case for a GST rise. The following table shows that Australia has one of the lowest GST/VAT rates amongst OECD countries.1

Base GST/VAT rates from the OECD countries - 20152  (percentages)

Australia 10.0
Greece 23.0
New Zealand 15.0
Austria 20.0
Hungary 27.0
Norway 25.0
Belgium 21.0
Iceland 24.0
Poland 23.0
Canada 5.0
Ireland 23.0
Portugal 23.0
Chile 19.0
Israel 18.0
Slovak Republic 20.0
Czech Republic 21.0
Italy 22.0
Slovenia 22.0
Denmark 25.0
Japan 8.0
Spain 21.0
Estonia 20.0
Korea 10.0
Sweden 25.0
Finland 24.0
Luxembourg 17.0
Switzerland 8.0
France 20.0
Mexico 16.0
Turkey 18.0
Germany 19.0
Netherlands 21.0
United Kingdom 20.0

Unweighted average 19.2

Super changes

Another area which is likely to be reviewed is the tax treatment of super. However, it isn't likely to be the contributions side of super that changes. After all, by international standards at least, the concessions offered for contributions are reasonable. What's more, the previous Labor Government brought in a tax on higher income earners.

Far more likely to change are the pension and investment benefits of super. Back in 2006/07, then Treasurer Peter Costello introduced Simplifying Super legislation. This fundamentally shifted our super from a reasonable benefit limit system (which measured benefits on the way out) to a system which measures contributions coming into super instead.

This led to a handful of super funds – less than 100 – putting millions into super as there were no contribution limits. The 2007 introduction of contribution caps stopped this, however many of Australia's wealthiest super funds benefited enormously from the change, as transferring super assets to the pension phase means no CGT is payable on the gains. While this is a great feature of super wraps at the moment, for SMSFs the Government may consider this no longer equitable. 

What might the Government do?

One possibility to address this inequity, looking back to the recommendations from the Henry tax review, is to tax investments earnings and contributions at 7.5 per cent.

The imbalance of the contributions tax at 15 per cent and 0 per cent taxed in pension phase would therefore be removed.

Even a 15 per cent tax rate is reasonable so another option the Government may try is limiting the amount that can be contributed as non-concessional contributions over a lifetime to $1 million. So instead of putting in $180,000 annually, clients can contribute up to $1 million. However once this amount is reached, the ATO will instruct the super fund to give the money back as the client has reached their limit.

An alternate possibility is the Government limiting super balances. ASFA have suggested that $2.5 million in a super fund is enough. Super balances over this amount could be forced to stay in the accumulation phase and not be allowed to go into the pension phase.

The CGT exemption

The 50 per cent CGT discount was also raised in the tax discussion paper as perhaps an overly generous concession. Moving the discussion to negative gearing, the paper suggested that negative gearing was, in itself, not a problem; it was more the fact that a CGT discount was available when the property was sold.

The new Prime Minister will be keen to put his own stamp on tax reform before the next election, something that has already been demonstrated by the shelving of the Government's own tax white paper. With all the changes to come out of Canberra recently, one thing is certain – the next 12 months will be an interesting time for financial advisers.

2  Rates do not include state-based equivalents or exceptions

The information contained in this newsletter is provided on behalf of the IOOF group of companies and is intended for financial adviser use only. It is given in good faith and has been prepared based on information that is believed to be accurate and reliable at the time of publication. Any examples are for illustration purposes only and are based on the continuance of present laws and our interpretation of them at the time.