The Federal Government has committed in excess of $130b to providing Government Stimulus packages to avoid a potential depression. Time will tell if this has been effective. Nevertheless, the nation will inherit debt that will need to be borne by all Australians.
For many years now I have said that we have an overly complex taxation system. It’s time to address this and simplify our system. Surely it is wiser to allow accountants and business advisers to concentrate on maximising a business’s potential rather than minimising taxes (legally of course). Based upon my rudimentary modelling, it seems clear to me that there are four key areas to be addressed:
- Increase GST
2. Change to Progressive Tax Systems – A flat rate of 20% for all, regardless of structure.
3. Changes to State Based Taxing
4. Capture and tax multinational income.
GST
Currently our GST is set at the rate of 10%. This is a true user pay system as it taxes on non-business consumption. Hence, those that that consume the most will pay the most. By implication, this means that those that have the most are being taxed the most. Seems highly equitable. And perhaps it is the time to increase this tax so that a larger portion of the nation’s tax base come from consumption. An increase to something like 15% would bring us in line with many other countries.
A further discussion should consider GST free items such as Health and Education? If this is unpalatable perhaps a stepped approach should be considered whereby we add GST to these items over time.
Changes by the Government as outlined here will create substantial increase in revenue, which can be utilised as part of the reduction in the nation’s debt.
Flat Rate of Tax
Many people argue that a progressive rate of tax is fairer to lower income earners than a flat rate of tax. Let’s consider a simple maths exercise. A 20% flat tax on earnings of $500,000 will generate $100,000 in tax. By comparison 20% flat tax on earnings of $80,000 will generate $16,000 in tax. As can be seen the higher the income the greater the tax.
To ensure that taxpayers do not restructure to take advantage of lower tax rates, it make sense to tax Individuals, Partnerships, Trusts, Companies, and Superannuation Funds all at the same rate.
I have canvased hundreds of clients over many years and asked them a simple question “If you were taxed a flat 20%, how would you feel about that?”. The resounding answer in almost all cases is, “Sure, where do I sign up?”
We, as Australians, are then incentivised to work and generate income. The flow on is that the Federal Government will receive more money than it’s ever seen. In turn, this substantial increase in both GST and income tax will provide the Government with the opportunity to ensure that ongoing social reforms where needed can occur, and that our lower income earners can be supported.
Surely, this is a win-win for all. There will always be the small percentage that will seek to avoid their share of tax. These “fringe dwellers” should be actively pursued by the taxation authorities. By simplifying our overly complex taxation system, we can reduce the complexities and then utilise our talented Public Service to chase these” fringe dwellers” that rort the system.
State Based Taxes
States need to raise revenue but are unable to tax income. Hence they have developed two of the most inefficient taxes in existence, being Stamp Duty and Payroll Tax.
Taxing a property purchase makes acquiring properties prohibitive. Surely, it would make more sense for there to be change to land tax to reflect the use of the property?
Payroll tax, besides being cumbersome has the effect of deterring people form wanting to employ more staff. It seems counterproductive to think because you run a business that sustains many families you get taxed more!
The lack of consistency between states further complicates payroll tax.
Multinationals
We often hear that it is the multinationals that divert substantial amounts of income to lower tax haven entities. With the imposition of a flat rate tax structure as discussed above, I would expect that these multinational entities would be far more inclined to leave money in Australia.
In the alternative, and should they still seek to rort the system, then we should empower highly credentialed legal firms to pursue these multinationals. Often, it is these firms that have created these opportunities in the first place. So, why not engage them to find the solutions.
By considering adopting all the above we are not only future proofing our country but providing an opportunity to reduce the substantial debt created by the Covid-19 pandemic.
Starting a ground swell in relation to these four steps requires open dialogue and following up our local Members of Parliament. If the Covid-19 pandemic has taught us anything, it is that we cannot to do the same old thing and expect different results. We need to think laterally and plan for change.
– Michael Sojka, Managing Partner at Rose Partners
