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Finding a happy ending to tax reform saga


If the story of reforming Australia’s tax system were a novel, it would be a saga stretching from hope to despair, with confusion and apathy in between.

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Last year Joe Hockey got us excited with lofty plans to overhaul a tax system built in the 1950s to suit a far different world.

He outlined some important facts: in the next decade, “bracket creep” will see almost half of all taxpayers move into the top two tax brackets; 70 per cent of tax comes from personal and company taxes; we have a rapidly aging workforce; and our health system is now under real pressure.

We need to find ways to encourage productivity and growth.

The tax system needs a big rethink.

Collective cheers were heard across the country.

Tax debate in turmoil 

But that was then and this is now, as they say. Today, instead of moving towards tax reform, we are immersed in ‘thought bubble’ politics.

The problem is you can’t run a country on light-bulb moments measured by opinion polls. You need clear strategies with good communication to help people understand there has to be change with trade-offs.

In simple terms, the government raises money by taxing income, taxing assets or taxing expenditure. In deciding on the right mix, policy makers need to step back and work out what combination is going to help make us more productive and globally competitive.

Every economist has a view on what that mix should be. However, it’s generally accepted that lower income taxes for both businesses and individuals encourages greater productivity. And if that’s the path we take, the budget hole still needs to be filled from somewhere.

Taxing spending through raising and/or broadening the GST is widely seen as the most practical move to fund taxation cuts across the board. But now the government has ruled that out we are in a spiral of indecision about what to do next.

Tentative moves to lower super contribution caps and changes to negative gearing also look to be moving off the Turnbull table.

As a tax law specialist, I’ve been asked many times what I think should be done.

Here’s my abridged wish list.


With an aging population, we have a massive task ahead of us to fund future pensions.

Superannuation is intended to help fund our own retirement and ease the public funding burden.

It’s not meant to be a tax dodge.

Let’s put the purpose in writing and make sure any changes to the super system from now on are consistent with that purpose.

The current debate is focused on taxing people on the way in (or limiting how much can go into super) because some see it as a way rich Australians build up wealth and minimise tax.

But why not look at taxing what’s left of super when someone dies? Then we haven’t discouraged people from saving for their retirement, but the incentive to build up more than they really need is eliminated.

Payroll tax

Malcolm Turnbull told our Premier [Jay Weatherill] payroll tax was an “efficient tax”.

Let’s face it, payroll tax, as it stands, is considered by many as a handbrake on expansion.

Realistically, it can’t be scrapped without a replacement, but we can design a system that encourages growth but doesn’t discriminate as harshly against labour-intensive industries.

Trust taxation

The taxation of trusts is one of the most complicated areas of tax law. Unfortunately, many small businesses operate through trusts so the complexity of this area hits small business owners the hardest.

Entity taxation (taxing trusts like companies) was attempted by former Federal Treasurer Peter Costello in 2000. It was put in the too hard basket.

We had another go at reform in 2011 but, again, it got too hard. The ‘interim’ patch-up we got five years ago is still with us.

It’s not a particularly sexy topic, but the red tape we could save on if this was fixed puts it high on my wish list.

Remaining globally competitive 

While issues of tax reform are part of a national debate, there’s a big impact on South Australia. Unemployment here is facing an upward trend, business confidence is suffering and we need incentives to attract new industries, grow jobs and retain talent.

In the next decade, staying globally competitive will be crucial. But if last year’s figures from CEDA are anything to go by, we may be in trouble.

Our poor economic performance and high levels of government debt saw us slide to 18th spot out of 61 nations. Meanwhile, the new ‘rock star economy’ of New Zealand shot to number 17.

Of course, the hardest part of tax reform is having the stomach to take action even though it’s politically difficult. But now is the time to do something before we lose our chance.

I’m not holding my breath though in an election year. At this rate, tinkering around the edges seems the most likely result we’ll get.

Andrea Michaels is a tax law specialist and the managing director of Adelaide firm NDA Law.

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