The Tax Institute has made its submissions to the Government about what they ought address, in their 2022-23 Federal Budget. The Budget is currently scheduled to be handed down on 29 March 2022 (see this article about how this knits with the election cycle, and the chances of it being changed). The Institute gave the following summary of its submissions, to its members by its weekly email: TaxVine (#2, 4/2/22).
Federal Budget 2022–23 submission
On 6 December 2021, the Minister for Housing and Assistant Treasurer, the Hon Michael Sukkar MP, called for submissions from individuals, businesses and community groups on their views regarding priorities for the Federal Budget 2022–23. Submissions closed on 28 January 2022.
The Tax Institute’s submission built upon our previous submission for the Federal Budget 2021–22 (2021–22 submission) and Case for Change, continuing the highlight the dire need for tax reform in Australia. Our submission also incorporated feedback from our members and National Technical Committees to highlight key issues in our tax system that require urgent rectification.
In preparing this submission, credit must be given to members of The Tax Institute and our National Technical Committees for working with the TPA team to identify pertinent issues and design workable solutions. We look forward to continuing to build on this collaborative approach and help create a better tax system for all Australians.
The need for comprehensive reform
As detailed in Case for Change, there is a crucial need to reform Australia’s tax system. The natural disasters of recent years, compounded by the ongoing costs of the COVID-19 pandemic and Australia’s need to support a vast and rapidly ageing population, has put immense pressure on a tax system that needs to be capable of promoting economic recovery and providing a strong foundation for Australia’s future. The complexities, inefficiencies and costs of our current tax system are well documented and are further exacerbated by continued short-term focused tweaks by successive governments.
The Tax Institute recommends an independent review of the Australian tax system and holistic reform based on the principles of simplicity, equity and efficiency. As part of a holistic reform of our tax system, the GST base should be broadened in conjunction with an increase to the rate, reducing our reliance on less efficient taxes, such as personal and corporate income taxes. Consideration should also be given to abolishing, or streamlining if there are ulterior policy motives, the large number of highly inefficient taxes that do not raise notable amounts of revenue, including the luxury car tax, excises and alcohol taxes.
Addressing urgent outstanding issues
Our submission regarding the Federal Budget 2022–23 re-iterated the importance of fixing existing issues in our tax system that were discussed in greater detail in our 2021–22 submission, and we call on the Government to address them as a matter of urgency. Some of the key issues and our recommendations are noted below:
- Apply a single, lower corporate tax rate of 25% to all companies, irrespective of their aggregated turnover or proportion of passive income. This will significantly reduce current complexity and compliance costs, especially with respect to franking credits, and make Australia more competitive in the international business landscape.
- Undertake a holistic review of tax rates for individuals, simplify and adjusting the marginal rates to make them easier to understand and reflect the cost of living in today’s society, and ensuring they are better integrated with our social security system.
- Introduce a standard deduction for work-related expenses, with the option for taxpayers to claim actual deductions provided they have the appropriate evidence to substantiate the claims.
- Better target the recent changes to the Child Care Subsidy to support lower-income families by boosting the cap to 95%, regardless of the number of children, and reviewing the hourly cap.
- Allow Australians near retirement age the ability to access their superannuation in the short term to assist them in the process of downsizing, reducing the impact and stresses caused by financing these lifestyle changes.
- Reform the current approach to penalties for breaching the Superannuation Guarantee (SG) rules to remove disincentives for employers to report and rectify SG non-compliance.
- Replace the Fringe Benefits Tax (FBT) regime with a new, principle-based approach that prioritises simplicity and lowers compliance costs for businesses.
- Introduce an all-encompassing concept of ‘worker’ that covers both Federal and State Governments, to reduce the compliance costs and keep up with the recent changes and trends in the labour market (such as the ‘gig economy’). [This could be a HUGE boon to the nation…]
Fixing the non-arm’s length income provisions
The non-arm’s length income (NALI) rules contained in section 295-550 of the Income Tax Assessment Act 1997 are in urgent need of legislative reform. Following the release of the ATO’s recent Law Companion Ruling LCR 2021/2 and Practical Compliance Guideline PCG 2020/5 about the application of the NALI rules to non-arm’s length expenditure (NALE) arrangements, it has become evident that the rules in their current form will have harmful impacts on individuals’ superannuation balances beyond what was intended.
The scope of these rules likely means that most, if not all, superannuation funds, will at some time fall foul of them, tainting all future income and gains from assets of a superannuation fund. The resulting tax liability at 45% is grossly unjust given the potentially immaterial nature of the breaches such as mere in-house bookkeeping, services being provided to funds at little or no margin by wholly owned entities, or trustees acting in the best financial interests of their members by choosing a lower cost option.
Over the past year, we have been working with numerous other professional bodies on the significant inequity in our NALI rules. Our recent letters to Senator Jane Hume and Treasury highlight the extent of the problem and suggest potential avenues for reform, subject to further consultation.
Review and refresh of statutory thresholds
The Tax Acts contain a vast number of thresholds, rates and caps used for a variety of purposes. These include determining the eligibility for various small business tax concessions and relief measures to determining an entity’s liability to tax. Some of these thresholds, such as those used to determine liability to Medicare Levy Surcharge or the cents per kilometre rate used to claim car expenses, are indexed annually. Meanwhile other thresholds, such as the income tax rates or various thresholds used to classify a ‘small business’, are changed only by legislative amendment.
Often these thresholds were introduced at a time when the underlying economic circumstances and living conditions were notably different to what they are today, even for those thresholds that are indexed. Our view is that the Government needs to undertake a comprehensive review and refresh of the various thresholds in the Tax Acts, particularly those that are altered only by legislative amendment. This will ensure that they keep pace with inflation and continue to apply to the intended taxpayers.
Expansion of the National Tax Clinic program
The National Tax Clinic Program across Australia plays a crucial role in providing pro-bono tax assistance to disadvantaged organisations and institutions. Tax Clinics nationally were able to assist 1,937 people and 2,407 people in the financial years ended 30 June 2019 and 30 June 2020 respectively. Despite these enormous efforts and the additional funding for the program by the Government, there is still a large number of disadvantaged members of the community who need assistance.
The Tax Institute is of the view that Tax Clinics will greatly benefit from additional funding to ensure that they can assist a greater number of vulnerable taxpayers. Additional funding will also assist Tax Clinics in providing greater support regarding:
- elements of financial distress that extend beyond tax affairs, such as poor accounting/record keeping, financial management and business planning; and
- literacy in financial management and tax matters for individuals and small businesses.
Conclusion
Our pre-Budget submission is another step taken towards convincing the Government to address the issues that most impact taxpayers. We eagerly await the Government’s final position when the Federal Budget 2022–23 is released on Tuesday 29 March 2022.
Scott Treatt, CTA – General Manager of Tax Policy and Advocacy’s Report
[Tax Month – February 2022 – Previous 2022] 4.2.22