The Federal Budget will be brought down on 3 May and there will be an election (one way or another) soon after. This puts tax and tax reform firmly back on the national agenda…. again.
The upcoming Budget is likely to contain some of the anticipated structural reforms expected, but shy away from the populist policy decisions touted in the media such as the removal of negative gearing.
Much of the tax and tax reform debate in Australia is focussed on the position of various interest groups and how the national revenue ‘pie’ should be carved up. When it comes to tax, however, it’s important to understand the foundations.
Australia has a working age population of 15.6 million. Of those, 81% paid income tax totalling just over $166 billion. Two point nine per cent (2.9%) of all taxpayers earn more than $180,000. This 2.9% contributed almost 30% of the total income tax collected.
In gross dollar terms, the largest income tax contribution comes from the 16.6% of taxpayers earning between $80,001 and $180,000.
About 5.6 million pay on average $1,400 per year in tax and 2.6 million of our working age population pay no tax.
These statistics illustrate how the tax debate can very easily skew. Any policy offering broad based income tax cuts, concessions, or incentives is immediately going to benefit higher income earners because they pay more tax. Conversely, the 8.2 million Australians earning no or low incomes do not benefit from income tax cuts as they pay no or negligible amounts of tax. It’s not a headline.
An example of how these statistics play out is the negative gearing debate. There is no question that negative gearing benefits high income earners because negative gearing only works as a strategy if you pay enough tax to offset the rental losses.
Rental interest deductions claimed cost $21.4 billion in 2013-14. If you include other forms of rental deductions such as capital works deductions for rental properties this figure rises to $42.5 billion.
To give some context to this figure, the total Defence budget for this same period was $25.3 billion. But, negative gearing is not a concession; it’s part of the broader tax system that allows deductions to be claimed against income producing assets and as such is not something that can be easily turned on or off simply for rental properties.
Similarly, superannuation concessions benefit those with the most income and wealth. As numerous Government reports have pointed out superannuation is an attractive savings and wealth management vehicle for middle and higher income earners because of the highly concessional tax treatment of contributions and earnings.
The reason why very high superannuation balances in particular are targeted for change is because it’s difficult to argue that the account balance is solely for retirement purposes as opposed to wealth management or estate planning purposes.
On the other side of the equation is the social welfare system; an essential part of any strong modern community. The latest statistics show that 27.5% of Australia’s working age population are on some form of welfare – this has reduced from a peak of 31.4% in 2002.
Of those on welfare, the age pension makes up 46%. You can see from this statistic the reason for some of the previous policy decisions to tighten assets tests and extend the access age to the pension.
And so the various sides of the debate line up.
Those on higher incomes argue that they already foot the lion’s share of the tax bill, so the tax concessions available via superannuation and negative gearing simply ease some of the pain.
Those on low incomes and welfare claim that these concessions unfairly benefit people who already are wealthy (or at least well off) and that the money should be redirected back into the budget to fund important government and community programmes.
Strong and cashed up interest groups such as the unions, the property industry, business groups and welfare lobby groups also will no doubt have their say during the Budget and election debate.
Stay tuned – it promises to be an interesting ride.
Source: Knowledge Shop Pty Ltd; Lvl 2 115 Pitt St; Sydney NSW 2000. The material and contents provided in this publication are informative in nature only. It is not intended to be advice and you should not act specifically on the basis of this information alone. If expert assistance is required, professional advice should be obtained.