The Tax Forum - Worth the wait?

5 October 2011

On 4 and 5 October 2011, 187 participants and 46 observers descended on the Great Hall of Parliament House in Canberra for the long awaited Tax Forum. The participants are drawn from the government (federal, state and local), business, unions, superannuation funds, the community, tax practitioners, financial planners, and academics.

The Government’s Tax Forum website tells us that “the Government has put in place a series of major reforms to build a stronger, fairer and simpler tax system, and the upcoming Tax Forum will help us build on that strong record of tax reform.”  It also tells us that “the forum will continue the conversation the Government started with the release of the Australia's Future Tax System Review last year.”

Such statements beg the question: what is the Government’s record on tax reform?

Things started off well with the announcement of the review of Australia’s Future Tax System in May 2008.  The Henry Review, as it became better known, was repeatedly described by the Government as a “root and branch” review and the most comprehensive review of the Australian tax and transfer payments system, including state taxes, for at least the last 50 years.  It was certainly more significant than the 1999 Review of Business Taxation (the Ralph Review) and at least as significant as the 1975 Taxation Review Committee (the Asprey Committee).

But the wheels started to fall off after the final report of the Henry Review was made public in May 2010.  Of the Review’s 138 recommendations, the Government accepted only a handful, rejected another handful and left the vast majority swinging in the breeze.  In fairness, the Henry Review should be seen as a blueprint for tax reform over a decade or more.  It would also be fair to say that “the conversation the Government started” with the release of the final report stalled before it ever really got going.

The most significant recommendation of the Henry Review accepted by the Government was for a resource rent tax, although to say the recommendation was “accepted” is somewhat misleading because the proposed Resource Super Profits Tax corrupted the recommendation in a number of ways.  Significantly, the Henry Review recommended a resource rent tax in conjunction with:

  • reducing the corporate tax rate from 30% to 25% (the OECD average);
  • abolishing resource royalties levied by the states; and
  • federal and state governments negotiating an appropriate allocation of the revenues and risks.

In contrast, the Government opted for a smaller corporate tax cut and tried to avoid dealing with the states by giving a credit for royalties instead of abolishing them.  The campaign mounted against the RSPT then contributed to the downfall of then Prime Minister Rudd, the appointment of Prime Minister Gillard, and the cobbling together of the Minerals Resource Rent Tax with a few of the major mining companies.  Meanwhile, Western Australia and New South Wales have proceeded to increase their royalties safe in the knowledge a credit will be given under the MRRT.

The circumstances surrounding the Tax Forum also call the Government’s record into question.  The Tax Forum is not an initiative of the Government.  Rather, it is being held as a condition of independent MP Rob Oakeshott’s support for the Government, and only after the Treasurer postponed it for four months.

So the Government’s record on tax reform isn’t stellar.  But the Tax Forum is now upon us and hopefully the participants will make the most of it.  Encouraging signs have been emerging in recent days, including the Treasurer’s apparent support for the carry back of tax losses.  This would enable a business that pays tax on a profit in one year but makes a loss in the next to carry the loss back and obtain a refundable credit for the tax paid in the prior year.  At present, losses may only be carried forward to offset future profits under strict rules.  The carry back of losses was recommended by the Henry Review 18 months ago and will, if adopted, bring Australia into line with a number of comparable tax systems including those in the US and the UK.  In these volatile and uncertain economic times, the carry back of tax losses would help some businesses to stay afloat.

A mature debate about a low rate tax on financial transactions would also be welcome.  Such a tax (better known as a Tobin or “Robin Hood” tax) requires global cooperation to be effective.  But the idea appears to be gaining traction in Europe so now is the time to start getting our heads around it.

A serious limitation on the Tax Forum is the topics that are off limits to it.  Real and effective tax reform is only possible if everything is on the table.  But the rate of GST, the minerals resource rent tax and the carbon tax are all off the table.  Apart from anything else, this seriously limits the ability of the Tax Forum to come up with revenue neutral proposals, as required by the Treasurer.

A higher GST rate could fund significant reform in other areas.  If the policy underlying the MRRT is sound, then its application to other non-renewable resources (such as gold as proposed by the Greens) should be debated.  And allowing the carbon tax to be discussed could help diffuse a hot political issue for the Government.  The Treasurer has now said that “participants that mention the mining tax or the GST won’t have their microphones cut off or be thrown out by bouncers.”  That’s good to hear but it doesn’t necessarily mean that the Government will take notice of what is said.

Real and effective tax reform in a federation also requires genuine and open engagement between the Commonwealth and the states.  Unfortunately, there seems to be no real appetite for this on either side of the fence, as evidenced by the states raising royalties in the face of the resources tax.  This makes it likely that the never ending calls for state tax reform will go unheeded yet again.

But, just as it’s important to play what’s in front of you on the football field, the Tax Forum is in front of us now and it does provide an opportunity to restart the conversation and put the wheels back on the tax reform cart.

The content of this publication is for reference purposes only. It is current at the date of publication. This content does not constitute legal advice and should not be relied upon as such. Legal advice about your specific circumstances should always be obtained before taking any action based on this publication.

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