Tax experts and economists have urged the government to prioritise holistic tax reform changes rather than minor tax measures as the government kicks off the third day of its productivity roundtable today.
The agenda for day three of the economic reform roundtable is focused on budget sustainability and tax reform and will explore areas such as the efficiency of government services, spending and care and how to create a better tax system.
In the lead-up to the roundtable, a wide range of groups, including the unions, business community advocates and industry associations, have put forward a raft of different tax reforms aimed at boosting productivity and addressing many of the structural challenges the Australian economy faces.
Major reforms to the tax incentives around housing and reducing Australia’s reliance on income taxes are expected to be among the big talking points today.
Earlier this month, the Australian Council of Trade Unions said the unions would advocate for a range of tax reforms measures at the roundtable including limiting negative gearing and capital gains tax benefits to just one investment property.
Unions will propose restricting negative gearing housing tax breaks and capital gains tax discounts to a single investment property.
Under the proposal, current negative gearing and capital gains tax housing tax arrangements would be grandfathered for five years to give property investors time to adjust to the new single investment property tax limits.
Institute of Public Accountants senior tax adviser Tony Greco said there is some merit to reviewing the current tax settings in this area with the current tax system encouraging the population to direct valuable resources towards passive assets.
“If the tax system incentivises people towards passive assets, then from a national perspective, that’s going to have a productivity impact. If you’ve got an investment in manufacturing and an investment in a passive asset, the tax system essentially says ’go for the passive asset’. So there’s a productivity connection in those tax settings,” he said.
Greco said the capital gains tax discount in particular is overly generous as the investor only has to wait 12 months to get it.
He said the government could consider reviewing the discount in terms of both the amount and timing.
“There’s lots of options on the table. You could go back to indexation, for example, or make it so that you have to wait longer before you get to the 50 per cent threshold,” Greco said.
However, Greco also warned the government against looking at specific changes in isolation, with the whole tax system closely interlinked.
“For example, if the personal tax rates came down, then the incentive for use things like negative gearing also goes down and people would start to look more broadly at other asset classes or other options,” he said.
“So you need to look at the interconnection between personal tax rates, the capital gains discount and negative gearing concessions,” he said.
Greco explained that while negative gearing on its own isn’t necessarily problematic and follows the fundamental principle that you can deduct something against your revenue, the government needed to review all the tax settings across the broader tax system.
“We need any tax reform to be holistic, rather than piecemeal because everything is interconnected in the system and you’ve got to think about it more broadly,” he said.
“Even GST should not be considered in isolation, it’s part of the things that need to be looked at holistically. Personal tax rates, CGT discounts and all other taxes and concessions all need to be reformatted or reset.”
AMP chief economist Shane Oliver noted that one of the issues with Australia’s system is that the top marginal tax rate is just under 50 per cent and it kicks in at around double average earnings, which means there’s a disincentive to earn more or stay in Australia in some cases.
“We could look at things like the negative gearing and the capital gains tax discount but it would need to be part of a package of pushing out the income tax thresholds, lowering the marginal tax rates and ideally rely more on GST,” he said.
“Anyone who thinks that simply fiddling with negative gearing or the CGT discount would suddenly make housing affordable has rocks in their head. It’s not the main story.”
Oliver noted that there has also been some discussion around the tax system favouring older Australians.
Looking at reforms such as increasing GST would be a way of rebalancing the tax system, he said.
Other accounting industry bodies are similarly hoping the roundtable discussion leads to more substantive tax reforms.
CA ANZ chief executive Ainslie van Onselen said tax reform was a critical part of boosting productivity.
“Our system is over-reliant on personal income tax, and that is unfairly punishing Australians also facing cost of living and housing pressures,” van Onselen said.
However, many are sceptical of the roundtable’s ability to deliver transformative reforms on the tax front given the potential political fallout Labor would face by introducing major tax reforms.
“Both sides of politics have managed to paint themselves into their respective corners because they’ve been stockpiling dishonest scare campaigns against the other side’s policies,” said Grant Thornton’s national head of technical tax, David Montani.
“The coalition has several, like negative gearing, carbon tax, and resource taxation. Labor largely has one super-scare weapon, the GST.
“And yet, issues like GST and negative gearing and so many others all need to be a part of the conversation if you’re talking about genuine, holistic reform. But each side can’t engage in big parts of that conversation, and that’s why I say it’s self-defeating.”
Liberal senator Andrew Bragg has already slammed proposals to partially restrict the capital gains tax discount and negative gearing tax incentives, labelling the policy “garbage”.
“I mean, what we have is a major problem of supply. The government has presided over the largest population growth since the 1950s, but also a massive collapse in housing construction, so we need to see more houses built,” Bragg said.
“Raising taxes on housing is not going to result in any new houses being built.”
Treasurer Jim Chalmers said the discussion at the roundtable so far had been constructive and that productivity would remain a central focus of the government.
Treasurer Chalmers said the government was looking to establish clear reform directions from the roundtable and broad based agreement on the direction that Australia should travel even if unanimity isn’t there yet.
The government wants to identify specific changes that can be agreed on now and ongoing priorities for further work, he said.
“We know that [productivity] is a long-standing challenge, we know that it’s also a global challenge. Almost every comparable country has a version of the productivity challenge that we have,” Treasurer Chalmers said.
“It has been baked in for a long time and it’s a global challenge but that doesn’t mean that we can’t work out ways collectively, consistent with our values as Australians to turn that productivity performance around.”
Treasurer Chalmers previously stated that the roundtable discussions were aimed at building consensus and building momentum.
“I don’t believe that we will solve every challenge in our economy in three days. This is all about three days to inform the next three budgets and beyond,” he said.
