The tax debate was reignited in Australia this week with the Government's release of its latest 196-page tax discussion paper.
The paper is based on the less than surprising premise that the world is changing and, as a consequence, Australia's "tax system is confronted with many challenges". These include financial deregulation, the growth of multinational companies and on-line retailing, all of which create tax avoidance opportunities.
The report states that Australia has experienced nearly 25 years of uninterrupted economic growth and the challenge is to sustain this growth. The Government wants to boost productivity as well as encourage higher workforce participation. It believes that changes to the tax system could create new opportunities for businesses and workers while promoting economic growth.
The report clearly states that the Australian Government "is committed to a better tax system to deliver taxes that are lower, simpler and fairer".
How does our tax system compare with Australia's and does the latest Australian report make any comments on the mutual recognition of dividend imputation credits between Australia and New Zealand and the taxation of online offshore purchases?
There are over 100 different taxes in Australia with the federal Government collecting around 81 per cent of total tax revenue, state and territory governments 15 per cent and local government 3 per cent, the latter mainly through municipal rates.
The Australian and New Zealand Governments have the following sources of tax revenue:
• Personal income tax: the Australian Government collects 50 per cent of its tax revenue from this source and the NZ Government 46 per cent of its tax revenue
• Corporate tax: 22 per cent of Australian Government tax revenue compared with 15 per cent in this country
• GST: Represents 15 per cent of Australian Government tax revenue compared with 26 per cent in NZ
• Other indirect taxes: 13 per cent in Australia and New Zealand.
Personal income tax is clearly the biggest tax source and is the main topic of debate when tax reform is discussed. The accompanying tax table shows the personal income tax rates in Australia and New Zealand, excluding Medicare and ACC levies.
Australians and New Zealanders will pay the following taxes (excluding Medicare and ACC) on these annual incomes:
• On an income of $50,000 Australians pay tax of $7800 and New Zealanders $8020
• On incomes of $100,000 Australians pay $24,950 and New Zealanders $23,920
• On an income of $250,000 an Australian pays $86,050 in income tax and a New Zealander $73,420.
These figures, which don't take into account any tax deductions or social security transfers, show that New Zealanders pay less core income tax than Australians the more they earn.
The Australian tax review noted that the large gap between the top personal income tax rate of 45 per cent and the 30 per cent company tax rate has resulted in tax planning and avoidance activities. These tax planning and avoidance opportunities are less attractive in New Zealand because the gap between the top marginal income tax rate of 33 per cent and the company tax rate of 28 per cent is comparatively low.
The Australian report places a relatively large emphasis on the taxation of superannuation and savings. It says that "interest, rent and dividend income is subject to tax at full marginal rates, while income from capital gains on shares is subject to a discount (50 per cent for individuals) and capital gains on a family home are fully exempt from tax. Superannuation is subject to yet another tax treatment."
The review believes that savings should be encouraged, particularly as Australian society ages, and it has a special section on Norway's low savings taxes. The Scandinavian country had a very low savings rate until a new tax system, which was introduced in 1992, capped the top marginal personal income tax rate at 47.2 per cent and introduced "a 27 per cent flat capital income tax rate for interest, rental income, royalties and capital gains".
New Zealanders have no reason to be envious of Norway because our top marginal personal tax rate is 33 per cent, KiwiSaver PIE funds are taxed at a maximum of 28 per cent and we have no capital gains tax.
The tax review also noted that Australia relies more heavily on corporate income tax than most countries. For example, in 2012 Australia's corporate tax was 5.2 per cent of GDP compared with the OECD average of 2.9 per cent. Australia's high corporate tax take is due to increased company profitability and the broadening of this tax basis through a reduction in the overall company tax rate.
The discussion paper establishes a clear case for reducing the corporate tax rate based on the following points:
• It would encourage more overseas investment in Australia
• It would discourage foreign firms from using transfer pricing and other measures to avoid Australian tax
• It would discourage Australian companies from engaging in tax avoidance activities
• It would encourage more investment by Australian companies.
One of the more surprising features of the Australian report is its criticism of the country's dividend imputation system. It believes that dividend imputation discourages foreign investment in Australia - and Australians from investing offshore - because these imputations are only available to Australians and only those who invest in Australian companies.
It asked whether the dividend imputation system "continued to serve Australia well as our economy becomes increasingly open?".
It also posted the following question: "To what extent would Australia benefit from the mutual recognition of imputation credits between Australia and New Zealand?".
This initiative would be greeted with great enthusiasm by New Zealand investors but the Australian report made the following unenthusiastic comments: "Mutual recognition might improve the allocation of investments between the two countries. However, it would likely impose higher revenue costs on Australia than on New Zealand and result in an overall cost to Australian GDP, due to the high levels of investment of Australian companies in New Zealand. Mutual recognition would also create additional complexity and increase administration and compliance costs."
Finally, Australia has one of the world's lowest GST rates, 10 per cent versus 15 per cent in New Zealand and an OECD average of just below 20 per cent. In addition Australia exempts a number of items including certain fresh foods, health, childcare, educational services, water, sewerage, drainage and certain financial services and residential rent.
The tax discussion paper believes that GST is a relatively efficient tax that has "relatively low adverse impacts on economic growth and living standards than other, less efficient taxes".
However GST is a hot issue in Australia and any changes will only be made with the agreement of all state and territory Governments. This means that any increase in GST will be difficult to achieve. Online purchases below A$1000 are exempt from GST in Australia compared with purchases below $400 in New Zealand. The issue here is that tax on these items is costly to collect.
An Australian Productivity Commission report concluded that there were strong in-principle grounds for lowering the $1000 threshold. However, the commission's final report determined that the complete removal of the $1000 threshold would generate additional tax revenue of A$600 million at a cost of well over A$2 billion to businesses, consumers and Governments.
The A$1000 threshold on overseas internet purchases looks safe because the commission recommended that it should "not be lowered until it is cost effective to do so".
A similar trade off between additional GST revenue and the cost of collection also applies in New Zealand, particularly as we have a lower $400 threshold.
• Brian Gaynor is an executive director of Milford Asset Management.