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.

Let’s not get bogged down in an old debate

Debate has raged for some weeks now about the 'opportunity cost' of the federal government striking a deal last year with the big mining companies over the design of the proposed new minerals resource rent tax (MRRT). Recent reports have suggested that the amount of revenue ‘lost’ could be as high as $100bn over 10 years.

While this sort of analysis makes quite an emphatic statement about the revenue that would have been collected had the original policy design been implemented, the fact of the matter is that it’s a waste of time to keep discussing hypothetical projections about the original policy design – that debate has already run its course.

An almost unanimous chorus of opinion last year concluded that the government's policy design for the original resource super profits tax (RSPT) was flawed, and that significant policy changes would need to be made if the new tax arrangements were to be fair and justifiable on policy grounds.

During the height of the mining tax debate last year, the Institute was one of the lone voices that said the original RSPT would deliver significantly higher revenues than what the government was forecasting at the time.

How did we know that?

Policy history in Australia suggests that the Treasury Department typically underestimates the potential revenue to be collected from new tax imposts: capital gains tax, fringe benefits tax and GST are recent examples. The RSPT was always likely to follow suit; and the MRRT may yet prove to be the same as well.

Recent figures released about the foregone revenue in fact reaffirm the veracity of the concerns raised last year - that the original RSPT was simply too big an impost on the Australian resources sector.

In my mind, I think it's reasonable to secure a better return to the community from the country's natural mineral wealth, but I don’t think it’s reasonable to extract mountains of cash from normal commercial businesses that take calculated risks in return for premium profits.

That said, this debate about revenues is for the history books.

Focusing on the future, I hope the government takes steps soon to release a White Paper explaining the detailed policy principles for the new tax, so that businesses and their advisers can begin to understand the inner workings of how the new laws will operate.

An announcement by the government is anticipated in the very near future. Stay tuned!

A watershed moment for policymaking

It is no government secret that all too often, big policy decisions are made behind closed doors and rolled out to an unsuspecting sector of the economy when the political timing is right.

But in a welcome change of gears, the financial advisory services industry will not have to run after the ‘bus’ of legislative reform.  This week, representatives of the accounting profession and financial planning industry came together with policymakers in federal government to broker an agreement on how financial planners who provide taxation advice will be regulated going forward.

In a watershed moment for policymaking in financial advisory services, the Assistant Treasurer and Minister for Financial Services and Superannuation, the Hon Bill Shorten MP, facilitated the agreement of a set of principles governing the regulation of financial planners who provide tax advice as part of financial planning services.

The new principles place consumer protection as the centrepiece of the design of the new regime.

The agreed principles spell out that ASIC would be the key agency for interacting with financial planners and consumers in relation to tax advice provided as part of financial planning services.  This would minimise duplication and red tape. However, ASIC would be supported by a strong and collaborative arrangement with the Tax Practitioners Board to utilise expertise (tax and finance), and ensure that consistent approaches to regulation can be implemented as far as possible.

This is a welcome milestone on a policy issue that has been lingering for well over 12 months, when financial planners were excluded from new rules introduced to regulate all tax advisory services and deliver consistent consumer protection measures to Australians who rely on that advice.

The details of this model are still being developed so changes are not yet applicable, but what is clear now is that the government will ultimately require planners to comply with specific competency standards in relation to the provision of tax advice; something that to this point, has not been a key feature of the existing Australian Financial Services licencing regime.

The Institute will continue to talk to the government throughout this ongoing process in the lead-up to the release of Exposure Draft legislation for public consultation in the next few months.

Overall, this is a very good outcome that prioritises the interests of consumers above other interests - precisely what you should do when you look to make important public policies changes such as this.

More information can be found on the Institute's website.

Easing the burden of natural disasters

Australia has seen its fair share of natural disasters this summer. Following the devastation caused by the flooding across Australia and Cyclone Yasi in northern Queensland, it is important for affected communities to rebuild and recover as soon as possible. The government’s responsibility is to assist individuals and businesses in this process.

A good way to speed up the recovery of communities is the introduction of an investment allowance for businesses impacted by the floods or the cyclone. This kind of incentive would encourage people to rebuild their businesses quickly and subsequently, rebuild the economy. The success of previous temporary investment allowances, such as the one used in 2009 during the global financial downturn, suggests this type of financial incentive is effective in kick-starting business activity when the economy needs it most.

For the long term, in light of this year’s natural disasters, and those in previous years (such as bushfires and storms), it is important that the government puts a plan in place to manage the unfortunate and unexpected (though not unpredictable) costs that natural disasters bring.

If the government sets aside funding (through cutting costs or delaying projects), Australia can be better prepared to rebuild and recover quickly, whatever nature may bring.

See our 2011-12 Federal Budget submission for more.

Increasing taxes: still not the answer...

As I unfortunately predicted in my blog last week, the federal government has proposed the introduction of a flood levy on taxpayers to cover the costs of rebuilding ravaged infrastructure in flood affected communities, in an effort to keep its promise to return the budget to surplus by 2012-13.

As I alluded to last week, the most effective way to meet Australia’s increased spending requirements is to defer the date of returning the budget to surplus – it is important to have a real-time sense of perspective about budget deficits and public debt. When successive governments have been trying to reduce the tax burden on Australians over the last decade, the last thing we need is a new levy.

Australia’s financial and risk management strategy should involve controlling expenditure and having the capacity to fund unexpected events or emergencies. While the flood crisis was an unexpected natural disaster on a massive scale, it was not unpredictable.

The question Australians need to ask themselves is: what can we do to ensure this country is able to deal with crises of this scale in the future? Will the flood levy set a precedent for future ‘one-off’ taxes?

The Institute has also published a media release on this issue.

Forget about tax increases – send in the ‘razor gang’ instead

As the full extent of the recent flood crisis across Australia begins to emerge, attention is turning to the extent and cost of the long-term devastation and ruin.

Estimates vary, but even conservative economists are suggesting that the floods could dampen Australia’s GDP growth by a full percentage point in the year ahead. If that’s correct, it would have a significant impact on tax revenue collections because the profits of many businesses will be negatively impacted in the short-term. On top of that, it is estimated that the floods could cost the government a minimum of $5 billion over the next three or four years. Some are even suggesting the final number could be as much as $20 billion.

In light of this new and unexpected financial burden, calls are increasing for the federal government to revisit its plan to return the budget to surplus in the 2012-13 fiscal year, and to push that timetable out so that the immediate focus remains on rebuilding communities and public infrastructure. Some knee-jerk responses that have already been put forward include increasing the current 1.5% Medicare levy. While that may be an easy option for the government, I don’t think that’s the right policy answer.

I suggest a more prudent approach would be to review all of the major federal government agencies’ spending programs with the objective of finding efficiency gains and expenditure cuts. When this kind of exercise is conducted properly, big dollar savings can always be found, and that will go a long way to plugging the financial hole.

Sending in the ‘razor gang’ to find cost savings is always very difficult to do, but in challenging times like these, it’s the right answer. Following the personal loss and devastation facing communities across the country, the last thing Australia needs is to increase the tax burden on taxpayers at a time when we are trying to move in the exact opposite direction.

Let the GST exemption go through to the keeper

Much has been said over the past few weeks by Australian retailers about their dire position as a result of our Goods and Service Tax (GST) laws, which exempt certain overseas purchases via the internet. If you take on board some of the commentary going around, you might believe that the $1,000 GST exemption for imported goods is the sole reason behind declining consumer spending across the country.

But, as with any debate like this, you have to take what you hear and read with a grain of salt.

The fact is, the GST exemption was put in place to provide relief from the significant compliance problems that would exist if every single importation into Australia – regardless of its value – had to be subject to GST.

Imagine if you had a friend overseas who sent you a birthday present (worth $100) via mail. Before you received the parcel, you would get a message from the Customs Service saying that before you could receive your present, you would have to send them $10! It may sound harsh, but that’s precisely what would happen if the GST exemption didn’t exist.

It would probably not be a very happy birthday!

The $1,000 exemption is there to ensure that these kinds of scenarios don’t arise. You can argue whether or not $1,000 is too generous. Ultimately, no matter where the line is drawn, someone is bound to disagree with it.

A little over a year ago, the Board of Taxation, an independent expert tax policy adviser to government, looked into the importation exemption. They concluded, based on the investigation and analyses they carried out, that due to the compliance problem that would arise if the threshold were reduced or removed, no changes were needed.

Australian consumers who choose to buy goods online from an overseas location do so because of a range of factors, such as currency exchange, the quality and availability of a comparable product in the Australian marketplace, and perhaps the GST. So, while the tax exemption would feature in the decision-making process, it is not the sole motivating factor. The argument progressed by Australian retailers fails to acknowledge the other factors influencing consumer spending.

At the end of the day, the $1,000 GST exemption exists for very good reasons. To move forward, the government should clearly explain its policy position to the retailers, and then move on to important policy initiatives. I believe the government should let this issue go through to the keeper.