In 2009 the Australian Government received a report from wide community consultation looking out 40 years to recommend tax system changes for strong, sustainable economic growth. It aimed to promote income growth throughout society and high-quality national infrastructure investment.
The contrast with the current debate is interesting. It proposed taxing super contributions as normal income with a 20% tax offset and also proposed halving to 7.5% the tax on income and gains within super funds. Contribution limits were to be $50,000 p.a. for those over age 50.
For non-super investment including property, it proposed replacing all offsets including negative gearing and capital gains discounts with a 40% across the board reduction in taxable income and gains from investment savings outside super. Personal income tax and company tax would also be reduced and simplified.
This 2009 blueprint for a simpler tax system aimed to fully exploit and integrate digital opportunities into our lives as unobtrusively as possible. The review envisaged we would stress our increasingly fragile ecosystems, so that environmental taxes would also be needed. It planned for a tax system design now that could efficiently deliver higher tax revenues if needed in future (e.g. due to aging population). This comprehensive review is commonly referred to as “the Henry Review”, for its Chair – then Head of Treasury, Ken Henry.
Its recommendations were a well thought out blueprint for a fairer tax system and we thought you might be interested in what it recommended. Both major parties have avoided implementing much of its findings. The most notable omission being the Resource Rent Tax that would have replaced State royalties – now a missed opportunity from history’s biggest commodities boom that is unlikely to be repeated.
The main ‘Henry Review’ recommendations were to:
- Simplify our ~125 taxes into 4 main revenue sources to concentrate on:
- A more comprehensive personal income tax base – the first $25,000 p.a. tax-free, then 35% tax rising to 45% over $180,000 p.a. Most work-related deductions as standard deduction based on work income. Include all work remuneration including employer super and fringe benefits as taxable personal income.
- More growth oriented business income taxes
- Economic rents from natural resources and land (resource rent tax replacing royalties)
- Broad but simple private consumption taxes
The only other taxes should be those aimed at social or economic costs like tobacco, alcohol, gambling and the environment.
All other taxes should be abolished – like payroll, property transfer, stamp duty, insurance taxes, resource royalties, luxury car tax, tax on super contributions, income tax on government pensions and benefits; fuel and vehicle registration (replace these with more efficient road use charges).
- Configure all taxes/transfers to support productivity, participation and growth.
Our future incomes and living standards depend on continued strong, long-term economic growth for Australia.
Specific tax changes envisaged were:
- A 40% taxable income reduction for all personal saving income (interest, dividends, rent); all other concessions abolished – no negative gearing or capital gains relief.
- Simplify personal tax-free rates – $25,000 tax-free threshold and two-step tax scale
- Include all forms of work remuneration in taxable income (employer super and most fringe benefits)
- Replace work-related deductions with a standard deduction linked to work income.
- Replace State taxes (including payroll tax) with a low-rate destination cash flow tax. Improve efficiency of GST on financial services.
- Make adequate, indexed support payments to the poor, disabled, carers and aged, while offering incentives to work.
- Reduce company tax to 25% to stimulates business entrepreneurship and discourage offshore profit-shifting.
- Possibly remove dividend imputation, for international uniformity.
- Simplify small business CGT concessions by removing the active asset 50% reduction and 15-year exemption. Increase the lifetime limit for retirement exemption. Taxpayers selling a share in a company or interest in a trust should access concessions via the turnover test.
What would the 40% reduction look like?
Changes to simplify superannuation:
- Abolish tax on super contributions, tax them as income but offer a 20% tax offset.
- Include employer super contributions in employee taxable income and within annual limits, all contributions would attract a tax offset paid to contributors.
- Tax income and gains within super funds at 7.5% (now 15% and 10% respectively).
- Allow contributors aged 50+ to add $50,000 p.a. with 20% tax offset.
- Include super balances in Age Pension means testing like other savings.
- Encourage longevity insurance products (the government should offer some itself).
- Allow 40% tax rebate on all net residential rental income and losses, and capital gains, while abolishing the negative gearing concession and 50% capital gains discount.
Mining & Land
- Replace State royalties with a 40% project-based uniform resource rent tax, assessed by capital allowance that recognises losses.
These recommendations were formulated by an apolitical panel (Dr Ken Henry, Dr Jeff Harmer, Prof. John Piggot, Heather Ridout and Greg Smith) with wide community consultation.
Do these recommendations provide a clue to changes we may eventually see in the years ahead, or has the landscape changed forever now? What do you think?
If you would like to discuss financial current affairs or just your investment options with one of our wealth management advisors, get in touch with Wotherspoon today!