It is great to be here on the Gold Coast and thank you to the Tax Institute for inviting me to speak at your annual national conference.
May I begin by thanking you for what you do?
You play an important role in educating your members and the broader tax profession about taxation policy. You also play an important role in developing and administering Australia’s tax laws.
The Tax Institute is a champion of change and meaningful reform in our tax system.
And as a nation, we need to once again discuss how our tax system can best serve us into the future.
And that future was clearly set out in the 2015 Intergenerational Report I released around two weeks ago.
It projects what the Australian population, economy and Budget could look like in 40 years time.
It lays down the challenges we face as our population changes. It gives us the information we need to make sure the best years are ahead of us.
A great positive for Australia is that we are living longer. In fact, we now have one of the longest life expectancies in the world.
A boy born today will, on average, live to over 91 years of age, and slightly longer to over 93 years if a girl.
A child born mid-century is likely to live close to 100.
This will contribute to a doubling in the number of Australians over the age of 65 by mid‑century.
Our longer lives and demographic shifts mean there will be fewer people of traditional working age supporting those who are out of the workforce.
For every person aged 65 and over, there are currently around four people aged between 15 and 64. In 40 years’ time, that number will nearly halve.
So, if we have fewer workers and more retirees by mid-century, how do we ensure that we can continue to pay for essential services in our communities?
Pressures on the tax system
Well, our 21st Century taxation system will have a great burden to carry.
The problem we face is that our current tax system, which was designed before the 1950s, is ill-suited to the 2050s.
As an example, the Australian Government still has an overreliance on income taxes, levied on both companies and individuals.
Around 2,000 companies paid approximately two-thirds of company tax in the 2012 financial year. In fact, 12 companies paid one third of company tax.
And a quarter of individual taxpayers paid 67 per cent of income tax.
Australia relies more heavily on corporate income taxes than most other developed countries. In 2012 corporate taxes accounted for around 19 per cent of tax revenue compared to around nine per cent on average for other developed countries.
This is a problem because the world economy has dramatically transformed in recent decades.
Think of financial deregulation, the growth of multinational companies and the increasing digitisation of global commerce.
Although these have been overwhelmingly positive developments for Australia, they also pose substantial challenges to the tax system.
We must ask ourselves some basic questions. For example, will we still be able to rely so heavily on a handful of companies to pay a large percentage of our taxes in the future? What will changing patterns of consumer behaviour and global commerce mean for the future of the GST?
These are tough questions we need to start discussing and planning for.
Taxation and government revenue
The 2015 Intergenerational Report shows that we are going to live longer and healthier lives over the next 40 years. This is welcome news.
We will also be richer as a nation. That too is welcome news.
But with a growing population living for longer, Australia must ensure we can meet the rising costs we face in areas such as health care and the aged pension.
With the right systems in place, we can create a more prosperous future where we can still fairly support the vulnerable in the community.
In response to these challenges and opportunities, our tax system must be able to raise the revenue required to provide the public services that Australians want.
At the same time, our tax system must promote and encourage growth in our economy and allow us to compete internationally.
To help us understand these changes, the 2015 Intergenerational Report outlines the projected trends in government spending.
Since coming to Government, we have significantly improved the Budget position.
However, the Intergenerational Report alsodemonstrates that the status quo is not an option.
Labor’s previous policy setting would have seen the ratio of payments to GDP on track to reach 37 per cent by 2055.
To pay for this, we would need to have higher taxes.
These higher taxes would be in addition to the already rising income taxes caused by bracket creep. Many Australians are not fully aware that they will be paying higher taxes as a result of the stealthy rise of bracket creep.
Bracket creep occurs when people are pushed up into higher tax brackets as a result of inflation and rising wages. However, if people are left in those higher tax brackets, this can lead to negative financial and economic outcomes, for individuals and the nation.
Now some would argue that bracket creep is a natural consequence of a growing economy.
Others will argue that the Australian community is prepared to pay more in taxes to address the demographic challenges we face.
I do not subscribe to the view that we can sit idly by and allow bracket creep to cover rising government spending.
Bracket creep
So, let’s examine the potential negative impacts of bracket creep on the Australian economy.
What impact do these rising taxes have on our ability to maintain the level of economic growth required to support our standard of living?
The Intergenerational Report makes it clear that with an ageing population, workforce participation is a critical issue for our continued economic growth.
However, bracket creep can discourage people from participating in the workforce.
A person choosing to pick up an additional shift, or even receiving a promotion, may end up paying more tax and at a higher tax rate, simply because of that higher income.
In fact, around 300,000 Australians are expected to move into the second highest tax bracket over the next two years.
In just 10 years, nearly half of all taxpayers will be in the top two tax brackets - an increase from around 27 per cent today to 43 per cent in 10 years time.
A person earning a taxable income of $80,000 – just above the average fulltime wage of $76,767 – would be at the upper limit of the second tax bracket. They would be taxed at a marginal rate of 34.5 cents (32.5 cents, plus the 2 cent Medicare levy) and pay $19,147 in tax in this financial year.
Through bracket creep, the next dollar they earn would be taxed at the higher marginal rate of 39 cents (37 cents, plus the 2 cent Medicare levy).
Now pay rises that lead to improvements in people’s personal financial circumstances are good news.
But when people get bumped up into a higher tax bracket, the disincentives may start to detract from economic growth. According to KPMG:
“…unchecked, the harmful effects of bracket creep are going to get worse, with an inevitable dampening of participation rates in the economy and hence of economic activity. Bracket creep hits modestly-paid workers hardest, proportionately, as they will face higher marginal tax rates.”
As the Intergenerational Report shows, we need to encourage more Australians who want to work to re-enter and stay in the workforce.
Over time, unchecked bracket creep could potentially reduce workforce participation and dampen the benefits afforded to the community by higher participation rates.
If people are discouraged from work and we can’t address our workforce participation challenges, then we as a nation will face even greater economic pressures.
Paying back bracket creep
To address the potential unintended consequences of bracket creep, governments need to periodically give tax cuts to maintain the rewards for effort.
If we don't give back these ratcheting tax collections through tax breaks then they start to constrain our ability to grow and prosper.
Obviously, the faster we can get to the point where as a nation we live within our means – and reach our target of a Budget surplus – the more capacity we've got to incentivise people through tax cuts.
Under the projections of the Intergenerational Report, at best, the Federal Budget would not be in a position to return bracket creep, let alone deliver further tax relief, until at least 2021.
This is unacceptable.
Even then the Report states tax relief would only be possible under the best-case scenario in which all the Government’s Budget consolidation measures were successfully implemented.
The policy scenario put forward by this Government leaves scope for future governments to reduce taxes or make productivity enhancing investments to make Australia more resilient to future economic shocks.
Lower taxes and a balanced Budget
The Government has already put forward the necessary structural reforms to help future-proof our economy.
Under our approach, real growth in government spending has been reduced from around three and a half per cent under the previous Labor Government to around one per cent real average annual spending growth. This is helping to strengthen our Budget position and put Australia on a credible trajectory to living within our means.
This has not been an easy task.
When the Government came to office in September 2013, there were 96 announced but unenacted tax changes.
In November 2013, we announced we would implement 18 measures, not continue with seven, change three and seek consultation on 64. We then announced our position on those 64 early the next year.
So, we have cleared the decks.
Strengthening the Budget is critical to ensuring the sustainability of government services.
The reality is that three quarters of the more than 400 Budget measures from last year have been implemented.
There are still a number of measures that will help balance the Budget that are yet to be legislated, including $5 billion of savings announced by the previous Government which they now oppose.
To help keep taxes lower, we have removed the Carbon Tax, and we have also honoured our pledge to abolish the disastrous Mining Tax.
But in addition to abolishing taxes, we have put significantly more effort into issues related to tax integrity.
In particular we have put in a substantial effort to ensure multinationals pay taxes in Australia on the income they earn here.
We have done this through a number of initiatives.
Firstly, with other tax administrations, we have been mapping the global operations of some multinationals that operate in the digital economy.
Secondly, under our leadership, G20 Finance Ministers will tackle base erosion and profit shifting to make sure companies pay their fair share of tax. We have also agreed to increase transparency and crack down on tax evasion.
Thirdly, Australia has taken a leadership role in the automatic exchange of tax information. We have taken another step in the fight against evasion and automatically exchange information with Switzerland based on the OECD’s common reporting standard.
It should be reassuring for all that the Australian Taxation Office has strong investigative powers to ensure that multinational companies operating in Australia are paying their fair share of tax.
And with additional resources, the ATO is undertaking more extensive inquiries and audits of multinational companies considered a risk to Australian tax collections.
The ATO is embedded in the offices of dozens of multinationals operating in Australia. By 30 June 2015, the ATO will have conducted around 200 reviews and 41 audits of the highest risk multinationals.
The tax profession
You, as tax practitioners, as key stakeholders and as trusted advisers, have an important role to play in shaping the system’s future.
As you know, practitioners will transition from the electronic lodgement service to standard business reporting in the next year. Under standard business reporting, businesses are able to use software to prepare and lodge key government forms directly from their computers to agencies like the ATO.
It will increasingly allow the ATO to pre-populate tax returns.
The rise of ATO ‘push’ returns and the decline of pure tax compliance activities in this new digital world will mean that practitioners will need to adjust their business models accordingly.
Importantly, push returns assist taxpayers with the inclusion of pre-populated tax data already held by relevant government agencies.
Conclusion
In response to the issues raised here today, the Government is beginning the conversation about how we create a tax system for the future.
We have a growing population that is living longer. So, with that demographic trend, the question is, how do we shape policies for the future rather than the past.
How do we make sure all along the way that the quality of life of every day Australians gets better – not just marginally better, but significantly better?
A well-structured tax system can help make Australia a more attractive place to invest, which will boost economic growth and create new jobs.
According to the Intergenerational Report, a better tax system would help Australia to take advantage of global opportunities and improve economic growth without having to rely on bracket creep or increased corporate taxes.
We need a ‘fit for purpose’ tax system – a 21st Century tax system – one that suits our modern and growing economy.
Tax reform benefits all Australians. This is why the Government is committed to a national conversation on tax reform through the Tax White Paper process. Of course, a meaningful conversation must deliver meaningful outcomes.
So, I am pleased to announce today that the first stage in this process will begin when the Government launches the tax discussion paper on the 30th of March.
The discussion paper will consider the competitiveness of Australia’s tax system, consistent with the Government’s aim for a better tax system that delivers lower, simpler and fairer taxes.
We look forward to talking with you further and to hearing from you about how we can rethink Australia’s taxation system.