Assistant Treasurer and Minister for Financial Services & Superannuation
14 September 2010 - 14 December 2011
Taxation Institute of Australia
26th National Convention
4 March 2011
What We Get For Our Taxes
Gough Whitlam's Treasurer Frank Crean, my colleague Simon's father, had a saying he was fond of: With taxes you buy civilisation, he'd say.
Taxes meant you didn't have to form free and voluntary agreements with your next-door neighbor to fix the potholes outside your front gate, or pay in full for urgent brain surgery an hour before it was performed.
And Wilde was right too of course, about the unique assuredness we can have in both death and taxes. I doubt either will ever be popular.
But it would be foolhardy to undermine the fundamentals of the tax system we have and flippantly dismiss how central taxes are to the Australian way of life.
Taxes fund the provision of goods and services that the private market cannot or will not provide, but are of crucial importance to the way we live.
Australians want good public services, adequate social safety nets and reliable infrastructure.
In other words, we all want school classrooms of excellence, an aged pension that helps keep our elder citizens comfortable and we want highways that are safe and swift.
Taxes provide us with resources to pay for vital community services such as roads, hospitals and medical care, schools, colleges and universities, defence of the nation, courts, police, museums, libraries, sporting facilities, parks. We could fill the morning listing what taxes pay for.
So let me be more specific.
There is an extra $4.1 billion going into health in the current financial year alone - largely due to the agreement to establish a National Health and Hospitals Network – a reform that will benefit all Australians.
An extra $5.3 billion in 2010-11 is being spent in social security and welfare, mainly on the indexation of personal benefits and income support payments such as the age pension and demographic and social factors such as the ageing population, which will continue to influence growth over future years.
And the Government's flood levy is a strong recent example of how taxes work effectively to fund the kind of society we want.
The flood levy will be quite small, 1 percent or less of income after deductions and only in place for one year, for about half our taxpayers. But when we add those individual contributions together across Australia, the impact of the levy on our efforts to rebuild after a series of natural disasters is very significant.
The levy is forecast to raise $1.8 billion and will be used to fund essential infrastructure and reconnect people in disaster affected communities like the one we're meeting in today.
Another crucial feature of our tax and transfer system is that it's progressive. People who are able to pay more do pay more, and resources are made available to people who cannot adequately support themselves.
Taxes also play a vital role in modifying incentives. They can be used to encourage productive activities that might otherwise be under-provided by the market (such as research and development) and can be used to encourage people to make better choices (for example, in relation to tobacco and alcohol).
Just by its size, tax plays an important role in our economy more broadly.
Over the last ten years, the Commonwealth alone has raised an average of nearly 24 percent of GDP in tax revenue.
And so it is of course crucial that we raise revenue as efficiently and fairly as possible.
The main Commonwealth taxes are personal income tax (45 per cent of total Commonwealth tax revenue); company tax (22 per cent); and GST (17 per cent).
Reining in the Tax Burden
Some people believe we are a high taxing nation, but the facts show that overall we are a relatively low taxed country.
As part of our fiscal strategy, the Gillard Government has committed to keeping the tax burden (taxation as a share of GDP) on average below the 2007‑08 level to ensure budget surpluses are delivered through disciplined spending and not higher taxation.
The tax-to-GDP ratio has dropped from 23.5 percent in 2007-08, when we came to office, to 20.3 percent in 2009-10. The fall was driven by significant personal tax cuts as well as the economic slowdown during the global financial crisis.
As at the 2010-11 MYEFO, taxation receipts as a proportion of GDP are expected to be 20.9 per cent in 2010-11 and so remain below the 2007‑08 level through the end of the forward estimates.
Across all levels of government, Australia's overall tax burden (27.1 percent in 2008, measured as total tax revenue as a percentage of GDP), was the sixth lowest in the OECD in 2008-09 compared with the eighth lowest in 2007-08.
The Government recognises that higher taxation reduces incentives to work, save and invest, which I believe are essential building blocks for ensuring Australia's long-term economic growth.
This is the public policy rationale that sees the Government delivering on its election commitment to provide personal tax cuts of $46.7 billion over four years from 2008‑09.
The three years of income tax cuts we have introduced since 2007-08 have provided significant tax relief to Australians.
For example, a single person with $40,000 of taxable income will pay $1,800 less in combined tax and Medicare levy in 2010‑11 than they would have had the 2007-08 tax scales still applied. A single person with $65,000 of taxable income will pay $1,150 less in combined tax and Medicare levy.
That kind of reduction assists people with cost of living pressures and engenders incentive to work.
A single person with $30,000 of taxable income in 2010-11 will pay 22.7 percent less in tax than they would have paid had the 2007-08 scales still applied. And a single person with $65,000 of taxable income will pay 7.6 per cent less in combined tax and Medicare levy.
The Gillard Government believes that tax cuts, and changes to cash benefits, have reduced the ‘tax wedge' (understood broadly as the difference between a family's private income and their disposable income) for many family types since 2007-08. So people are now keeping more of the income they earn.
A single person without children, earning $39,000 in 2007-08 and $44,500 in 2010-11 has seen their tax wedge fall by 1.7 percentage points since 2007-08, to 14.9 per cent in this financial year.
Since 2007-08, a dual income couple, earning around $58,000 and $19,000 respectively in 2007-08, and $66,000 and $22,000 in 2010-11 (that is, about Average Weekly Ordinary Time Earnings and one third of AWOTE), and with two children aged 3 and 8, has seen their combined tax wedge (including family assistance and childcare payments) fall by 1.9 percentage points, from 8.6 to 6.7 percent.
From the rudimentary tax considerations of kitchen table budgets to the more developed concerns of thousands of Australian small businesses – the Gillard Government gets it.
And we don't slack off when some tough issues come across our desks.
Today, I am pleased to announce that the Gillard Government will adopt two recommendations of the Board of Taxation to simplify the tax law for over 600,000 trusts. These address two key areas of uncertainty for trusts following the High Court's Bamford decision.
First, the amended law will clarify the definition of the income of a trust estate. This will address situations where the tax burden falls on a beneficiary despite not receiving the economic benefit.
Second, the law will be amended to enable streaming of capital gains and franked distributions to beneficiaries. Before the Bamford case, trusts commonly streamed income to particular beneficiaries and the Government wants to ensure that this flexibility can continue.
These changes will apply for 2010-11 and later income years with a discussion paper released today.
There are no easy answers and these are interim steps to ensure greater confidence and certainty in trusts. They will not solve all the issues highlighted by the Bamford caseand the Gillard Government remains committed to updating and rewriting trust laws more broadly. The expertise of the Tax Institute will be crucial in this reform process.
I do want to emphasise that the government has taken swift action on trusts where others haven't. We don't believe trusts are any form of tax avoidance. We see trusts as a legitimate feature of how Australians conduct their financial affairs. And there will be more to come in this space.
Response to an Economy in Transition
Since becoming Assistant Treasurer I have regularly heard from business about how we, everywhere in the world and absolutely in Australia, how we are clearly witnessing an economy in transition.
There are a number of economic forces and developments posing challenges and providing opportunities to Australia now and over the next decades.
One of the biggest is demographic change.
Today the proportion of Australians aged 65 years or older is 13 percent. By the middle of the century it's projected to be 22 per cent.
There is the rise and proximity of Asia as an economic power. China and India's share of world GDP was 7 percent in 1990, grew to 18 percent in last year and is forecast to grow to 33 percent in 2030.
There is globalisation. In 2009-10, Australia's exports of goods and services were valued at A$254 billion, or around 20 percent of nominal GDP. This compares with 15 percent two decades ago.
In 2009-10, Australia's income inflows from foreign assets were A$35.7 billion, or 2.8 percent of nominal GDP. This compares with 1.3 percent 20 years ago.
Our economy faces environmental pressures. There are 438 species or ecological communities on the official list of threatened fauna (under the Environment Protection and Biodiversity Conservation Act) and over 41 percent of these species are on the endangered list.
The mining boom is of course already a great changing influence on our economics.
The terms of trade rose to be 24.1 percent higher through the year to the September quarter last year. And the index is currently at its highest level since 1950-51.
Over the past decade, world prices of our non-rural commodity exports have increased, on average, by about 300 percent. Exports of these products represent about 10 percent of GDP.
As our Prime Minister said last month, five years ago, the money earned from exporting 10,000 tonnes of iron ore would buy about 280 dishwashers. Today it would buy you around 1,400 dishwashers, a 500 percent increase.
Our economy is also experiencing major technological advances. Or in other words the digital economy is transforming our world, our communities, our business and our lives.
Between 1998 to 2008-09, household access to the internet at home has more than quadrupled from 16 per cent to 72 percent.
More than 85 percent of individuals have at least one mobile phone in regular use.
My overall point here is that the Gillard Government's forward-looking tax reform agenda seeks to position Australia to meet these challenges and take advantage of new opportunities for the benefit of all Australians, now and well into the future.
To underline my point let me take you through some of the Government's to-date announced tax reform measures to embrace the opportunities and deal with the challenges of an Australian economy in transition.
Company tax cut
Australia needs to remain competitive in attracting foreign capital with increasing global economic integration and capital mobility.
Lowering the company tax rate from 30 percent to 29 percent from the 2013-2014 income years (with a head start for small businesses) will help ensure Australia remain an attractive place to invest.
Reducing the company tax rate also addresses the adverse impact of the mining boom and will ensure other sectors of the economy remain competitive.
While mining and mining-related industries will grow strongly, other non-mining, trade-exposed sectors of the economy, like manufacturing and tourism, can be expected to grow more slowly as a result of higher real exchange rates.
Reducing the company tax rate and attracting foreign capital to Australia will also boost the amount of capital per worker. Higher capital per worker leads to increased productivity which, given Australia's ageing population, will become an increasingly important source of growth.
While an ageing population in Australia is to be welcomed for the longer life we're all leading, this blessing does have financial implications.
The amount of people aged 65 years or older as a proportion of people of working age is projected to double by the middle of the century.
In forty years time we will likely have just 27 people of working age for every 10 aged 65 years or older, compared with 50 for every 10 we have today. This means there will be fewer people of working age to support older (and younger) people.
And the already rising costs of health and aged care (and state pension provision) are expected to account for a sizeable part of the projected increase in government spending.
As part of its 'Stronger, Fairer, Simpler'tax plan, the Government has announced several key superannuation reforms that will help prepare for the fiscal effects of an ageing population and ensure more Australians enjoy a comfortable retirement:
- increasing Superannuation Guarantee contributions to 12 percent;
- providing higher concessional contributions caps;
- providing up to $500 per annum into low income earner super accounts; and
- raising the Superannuation Guarantee age limit from 70 to 75.
These reforms will boost national savings and help fund investment in infrastructure required to accommodate the mining boom.
The Henry Review identified 3.5 million Australians getting little or no tax concession on their compulsory superannuation – the new $500 per year concession delivers for them.
Interest income discount
A growing population increases the demand for economic and social infrastructure, like schools, public transport and housing.
In order to maintain our high living standards it will be important to encourage people to save and boost national savings to ensure investment takes place to support the needs of future Australians.
From 1 July 2012, the Government will provide individuals with a tax discount equal to 50 percent on up to $500 of interest earned on savings. From 1 July 2013 this will expand to cover up to $1,000 of interest income.
Phasing down Interest Withholding Tax (IWT) & Investment Manager Regime (IMR)
The Johnson Report into our financial services found Australia is amongst the most sophisticated and advanced financial sectors in our region.
As part of the agenda to develop Australia as a regional financial centre and to take advantage of the economic re-emergence of Asia, the government will phase down interest withholding tax incurred by local subsidiaries and branches when they pay interest on borrowings from their overseas parents. And we'll review the proposal for an investment manager regime.
Phasing down IWT will allow local subsidiaries of foreign banks to access cheaper funding and minimise the extent to which funding choices are based on tax rather than commercial considerations, while an IMR is intended to encourage Australia's export of financial services.
Minerals Resource Rent Tax
Everyone in this room knows Australia has abundant non-renewable supplies of iron ore, coal, and hyrdocarbons, which are expected to continue to command high prices driven by increased demand, particularly from China and India.
The mining boom, the high Aussie dollar value and the impact of the resulting higher terms of trade is the major immediate challenge facing Australia's economy.
As part of its efforts to manage this challenge, the Government has announced improved resource taxation arrangements to better reflect the value of our environmental assets and ensure the Australian people, now and in the future, receive a better return on the profits from extracting our non-renewable resources.
The MRRT replaces inefficient production based royalties with less costly taxes based on economic rents.
The return on these resources can be directed to building a better nation through investing in infrastructure, and can fund productivity enhancing reform.
Simplifying the tax system is an objective built into basically every reform we plan, announce and deliver.
Greater tax certainty and reducing the compliance burden on individuals and business is important in promoting increased participation and productivity.
The Government has announced a number of reforms to simplify the tax system.
- an optional standard deduction in lieu of claiming work related expenses and the cost of managing tax affairs, of $500 in 2012-13 and rising to $1,000 in 2013‑14.
- A $5,000 small business instant asset write off will reward small businesses when they invest to grow and make tax time simpler for them.
Modernising and simplifying Australia's tax system and taking advantage of the possibilities offered by new technologies will provide substantial benefit to Australian taxpayers.
For instance, the standard deduction is an important step on the way to a 'tick and flick' system of pre-filled tax returns. As I said in Canberra earlier this week, it will remove the hassle of keeping a shoebox full of receipts. When fully phased in about 6.4 million Australians will save time and get a bigger tax return by just ticking the box
So while the Government is getting on with improving and administering a tax system that is progressive, balanced and fair, sadly this necessary task is not supported by our political opponents.
It brings me no pleasure to say the Coalition's serious tax plans for Australia are either seriously absurd or seriously non-existent.
If one cares to look at what they stand for, it is little more than standing to oppose all of the Gillard Government reforms. They want:
- Less super savings, with no increase to the compulsory rate;
- Lower superannuation contribution caps for over 50s;
- No contribution concessions on compulsory super for 3.5 million low income earners;
- More complex personal taxes, with no standard deduction;
- Greater taxation of savings income, with no 50% tax discount on interest;
- More complex tax for small business – with no instant write-off;
- Lower investment in the infrastructure our resource regions need, with no $6 billion regional infrastructure fund;
- A worse return on Australia's non-renewable resources.
They talk about wanting reform, but every single action they take is in fact anti-reform.
They copied word for word The Government's list of Henry Review rule outs, and then ruled out a further 13 recommendations.
And they ruled out delivering any tax reform during a first term (had they been elected).
Their idea of tax reform seems to be nothing more sophisticated than a $6 billion company tax increase during the election, to pay for their Paid Parental Leave scheme.
And an expensive, time wasting thank you note on personal tax returns that is such bad public policy that I won't even bother your time with it.
This is all the more disappointing because politics hasn't usually been like this. I think the current petty and cynical approach is beneath the Liberal Party's greater history.
Regardless of political allegiances my belief is that the Liberals have, historically, at least been rational and thoughtful contributors to our nation's economic story.
A Historical Tax Perspective
Australia's tax system has come a long way since the end of the nineteenth century when six separate colonies had distinct tax systems, almost entirely reliant on customs and excise duties.
It all began in 1910 when Andrew Fisher's government responded to the need for funds to pay for old age pensions and what then were called invalid pensions.
The Income Tax Assessment Act 1915 – a relatively simple document of 22 pages on its debut – saw the introduction of a federal income tax that would help pay for the rising calamitous costs of World War One. And later of course taxation revenue enabled Australia to pay the mountainous costs of the Second World War.
The economic crisis of the Great Depression of the 1930s led to the introduction of sales tax in 1930 which provided much needed ballast in the financial tsunami of those times. Indeed the Income Tax Assessment Act of 1936 still governs much of the way we are, and how we make do.
The income tax installment scheme began in 1941 and led to national income tax collection by the Commonwealth in 1942, a shrewd move then that the West Australians have seen ever since as a foolish surrender.
Consistent with most industrialised countries, Australia's tax take (tax to GDP ratio) grew significantly over the twentieth century to fund an expanded role for governments. Such was the hunger of the modern welfare state.
Until the mid-1970s, governments focused on expanding sources of revenue to fund new goods and services.
The first taxes in Australia were raised to help pay for the completion of Sydney's first gaol and provide for the orphans of the colony.
Later, duties on major export products such as timber, wool and seal products were introduced to fund new transfer payments, such as the widows' pension and unemployment relief.
Since the 1970s, successive governments have focussed more on improving the equity, efficiency and simplicity of the tax system.
In this regard, honing a simpler, fairer tax system is of course not a process that began when this Government came to office. Instead, it is a story involving governments of both political persuasions, with major reforms like the introduction of capital gains tax in 1985 and fringe benefits tax in 1986.
These taxes broadened the tax base, reduced tax avoidance by subjecting a greater range of income-producing activities to taxation and therefore improved the fairness of the tax system.
There's also the consistent treatment of retirement savings paid as an annuity or lump sum from 1983 and the introduction of the Superannuation Guarantee in 1992, which aimed to gradually increase the size of individual superannuation assets and coverage of the population.
Superannuation is now a national icon like Medicare, HECS or the Melbourne Cup.
There was also the removal of accelerated depreciation arrangements following the 1999 Review of Business Taxation. By aligning depreciation rates to an assets effective life, this change removed distortions to investment decisions and largely funded a reduction in the corporate tax rate.
And the introduction of the goods and services tax in 2000 expanded the tax base and enabled the removal of less efficient federal and state taxes, such as wholesale sales tax and debits tax.
The work the Gillard Government continues today is part of a good story.
I do want to come back to and conclude my remarks with my initial theme – the civilising nature of taxation.
Tax is why, if your boat is in trouble off Lord Howe Island, rescue helicopters come for you.
Tax is why if your child is disabled he or she can still get an education. Can I add here that I fervently believe we need to do more to help Australians with a disability and I welcome the Productivity Commission's important draft report earlier this week as part of its inquiry into support for Australians with disability.
Central to the PC's recommendations is the pressing need for a major change to the way people with disability are supported. And I support the Prime Minister in her words and sentiment that the status quo is unacceptable.
What we end up doing and how the reforms are funded remains an open question. But it's yet another reminder of what we can and should do with national revenue in a decent society.
Tax gives you the ABC, and it costs you less than a dollar a week, the price of an ANZAC biscuit or half a cheap cup of coffee every week. It gives you Chris Uhlmann and Leigh Sales, who give us no quarter.
Without tax we would have no defence force, no universities, no TAFEs, no acting schools, no Opera House, no Cate Blanchett, no Geoffrey Rush. Tax trained and funded their early careers. You in your life spent, probably, 13 cents training and sustaining Cate and Geoffrey, when they needed you. Was it worth that enormous sum? I think so.
Tony Abbott recently talked of the great big new tax that got a shipwrecked orphan to his father's funeral, and other survivors of a terrible storm to their loved ones' gravesides.
It cost each Australian taxpayer three cents, and the price, Tony Abbott said, was too much. Tony Abbott is like that.
We are Australians, and it is a part of our idea of the Commonwealth that we pay taxes ungrudgingly in this fair-go country.
It is our way of being civilised. It is everybody's way of being civilised. It is not a magic potion, it is not a magic pudding.
But it is a way, and the best way, I believe, of using available resources for the common good.
Thank you for the work you do in helping fashion our fairer, better, stronger, simpler system.
I look forward to your questions.