The Treasurer Mr Joe Hockey has released a 203-page tax discussion paper which includes the challenges the Australian tax system faces, the way it currently operates, potential opportunities for reform and some of the trade-offs that would need to be considered.

Challenges – according to the discussion paper, the challenges are as follows:

  • the rise of the digital economy and globalisation presents significant challenges for the effectiveness of the tax system. Capital is more mobile and highlights the need for a competitive corporate tax regime to encourage investment. Multinational corporations operate across many jurisdictions and the location where tax should be paid can be difficult to determine.
  • bracket creep, which pushes people on to higher tax rates with rising incomes over time, is a growing problem that impacts on workforce participation. Changes to our tax system could foster new opportunities for businesses and workers and promote economic growth, some even arguing that comprehensive tax reform could promote economic growth more than any other area of government policy.
  • Australia has a higher reliance on income taxes, including tax raised from company income, than most other comparable countries. State and territory governments rely considerably on taxes that impose high economic costs, like stamp duties.
  • the tax system is too complex, with significant resources spent on tax compliance and tax management activities due to the prevalence of tax concessions aimed at assisting particular groups, regular “patching” of the law to fix narrow problems or provide certainty for taxpayers and transactions without fully considering consequences for the system as a whole and overly risk-averse attitudes from policy advisers and administrators, combined with complex legislative drafting styles.
  • the tax and social security (transfer) systems that are intended to contribute to fair outcomes can nonetheless discourage workforce participation for some. Our relatively high top marginal tax rate and the gap between the top marginal tax rate and the company tax rate results in tax planning and avoidance. Tax concessions need to be well justified to ensure the fairness of the tax system.
  • the tax treatment of savings is very complex and distorts savings choices. Some savings are taxed at full marginal rates (eg bank accounts) while others are not (eg superannuation) affecting people’s choices about how to save without necessarily doing much to increase savings overall.
  • while tax reform needs to be focused on the long term, the impacts of the transition process from existing policy to new policy needs to be understood and carefully addressed so that changes balance the interests of different groups.

Consultation process – The submissions process starts with the release of the discussion paper. Submissions close on Monday, 1 June 2015. These may be made on the website.

Questions or comments on the tax discussion paper may be made to Tax White Paper Task Force, The Treasury, Langton Crescent, PARKES ACT 2600; email:; phone: (02) 6263 2304.

Following consultation on the tax discussion paper, the government intends to issue an options (green) paper in the second half of 2015. The government will then set out its reform proposals in a white paper, and take them to the next election in 2016.

Questions for discussion – The paper sets out 66 questions for discussion. These questions include the following:

  • What should our individuals income tax system look like and why?

  • What should our fringe benefits tax system look like and why? 

  • At what levels of income is it most important to deliver tax cuts and why?

  • Under what circumstances is it appropriate for assistance to be delivered through tax offsets?

  • To what extent do the arrangements for work-related expense deductions strike the right balance between simplicity and fairness?

  • To what extent does our fringe benefits tax system strike the right balance between simplicity and fairness? What could be done to improve this?
  • To what extent are the concessions and exemptions in the fringe benefits tax system appropriate?

  • What tax arrangements should apply to bank accounts and debt instruments held by individuals?

  • To what extent is the rationale for the CGT discount, and the size of the discount, still appropriate?

  • Do the CGT and negative gearing influence savings and investment decisions, and if so, how?

  • How appropriate are the tax arrangements for superannuation in terms of their fairness and complexity? How could they be improved? 

  • How important is Australia’s corporate tax rate in attracting foreign investment? How should Australia respond to the global trend of reduced corporate tax rates? 

  • To what extent does the tax treatment of losses discourage risk-taking and innovation and hinder businesses restructuring? Would alternative approaches be preferable and, if so, why? 

  • How could the current tax treatment of intangible assets be improved?

  • To what extent does the tax treatment of foreign income distort investment decisions? 

  • To what extent should the tax system be designed to encourage particular forms of outbound investment (eg by distinguishing between active and passive or portfolio and non-portfolio)? If so, what principles should inform this? 

  • How can tax avoidance practices such as transfer pricing be addressed without imposing an excessive regulatory burden and discouraging investment? 

  • Should the tax system provide a more neutral treatment of different financing arrangements (debt, equity and retained earnings), and if so, how? What principles should inform the approaches? 

  • Should the tax system provide a more neutral treatment of income earned on revenue account and capital account? Does the distinction create significant compliance costs for business and, if so, how could it be simplified? 

  • In what circumstances is it appropriate for certain types of businesses to be subject to special provisions? How can special treatment be balanced with the goal of a fair and simple tax system?
  • Does the R&D tax incentive encourage companies to conduct R&D activities that would otherwise not be conducted in the absence of government support? Would alternative approaches better achieve this objective and, if so, how? 

  • How effective is the current range of tax concessions (such as CGT and industry specific concessions) at supporting small business engagement with the tax system? To what extent do the benefits they provide outweigh the compliance, complexity and revenue costs they introduce?
  • Are the current tax arrangements for the NFP sector appropriate? Why or why not?

  • To what extent are the tax settings (that is, the rate, base and administration) for the GST appropriate? What changes, if any, could be made to these settings to make a better tax system to deliver taxes that are lower, simpler, fairer?
  • What are the relative priorities for state and local tax reform and why?

  • To what extent does Australia have the appropriate mix of taxes on specific goods and services? What changes, if any, could improve this mix? 

  • What parts of Australia’s tax system, and which groups of taxpayers, are most affected by complexity? What are the main causes of complexity?
  • Could the arrangements for developing tax policy in Australia be improved? If so, how?

[IT 30/3/15] [LTN 60, 30/3/15]