Monday, March 21, 2011

New thinking: link carbon pricing to tax reform

Late last week, Professor Ross Garnaut released Paper Number 6 as part of his 2011 update review into climate change.

In this paper, Professor Garnaut discusses a number of issues that link climate change policy to the need for major tax reform in Australia. There are a few points made in his report that resonated with me.

Firstly, he points to the fact that the implementation of a carbon price in Australia will, inevitably, have short-term negative effects on economic growth and real wages. He says that ‘judicious’ use of the revenues generated from the carbon price could help to offset many of those short-term negative effects on the economy. Specifically, he suggests that half of the anticipated $11.5bn in revenue generated in 2012-13 should be used to fund cuts to personal income tax rates and provide incentives for people to return to the workforce. I believe that these ideas are appropriate, and entirely consistent with those set out by Dr Ken Henry is his landmark Future Tax System Review.

Secondly, Professor Garnaut criticises the current concessional fringe benefits tax rates that apply to motor vehicles. These rules essentially provide a direct incentive to reduce tax liabilities by travelling greater distances in a 12 month period. This runs counter-productive to the broader policy efforts by the government to encourage environmentally responsible behaviours. This is a point that we, at the Institute, have been making for a number of years.

We are yet to see a specific response from the federal government to Professor Garnaut’s recommendations around the need for tax reform. However, his arguments provide further evidence of the need to urgently commence a broad-based discussion about the make-up of Australia’s future tax system. The government’s national tax forum, now to be held in October this year, will be the opportune time for this conversation to take place.

Monday, March 14, 2011

Tax time: deal or no deal?

Since the federal government announced the first major step towards simplification of Australia’s complex personal income tax return system last week, there has been a lot of talk about how the changes will impact the Australian public.
 
The initiative follows last year’s announcement by the Treasurer that from 1 July 2012, individual taxpayers will be entitled to claim an automatic deduction of $500 (rising to $1000 in the following financial year) for work-related expenses and costs of managing tax affairs.
 
In other words, the government is making a ‘deal or no deal’ offer to taxpayers: claim $500 without needing to keep any receipts, or claim a different amount if you want to maintain documentation to support your claim. From a policy perspective, it’s one of those rare ‘win-win’ scenarios for individual taxpayers and is a good first step towards the simplification of tax compliance.
 
For some tax agents, this sort of simplification would be considered a win as well. Freeing up resources from focussing on straightforward tax returns enables more time to work with clients who have more complex business affairs and therefore require high value-add advice.
 
In order for this simplification idea to be effective, however, there needs to be a significant take-up of the offer. The question is whether or not $500 (or even $1000) will be enough to entice people to take the deal. Data suggests that individuals claim an average of around $2,000 every year for work-related expenses. When budget conditions allow, I think the government will need to make the offer much more attractive in order to ensure a significant take-up across the population.
 
While the standard deduction is a good first step, I predict that in the next few years the Australian Tax Office (ATO) will be capable of taking a giant leap forward around simplifying compliance further. For taxpayers with straightforward affairs, I would like to see a one-page tax return from the ATO, pre-populated with information already received from third parties, (such as employers, banks and companies). Taxpayers would simply sign the form, send it back, and wait for their refund.
 
Don’t think that this sort of idea is a distant dream – simpler tax returns are just around the corner.

Find out more about this issue from Assistant Treasurer Bill Shorten at the Institute's National Tax Conference in April.