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The risks of losing our "tax morale"


Lack of trust in governments and relatively high rates of income tax could damage Australia’s “tax morale” – and that spells trouble for everyone, writes Adelaide tax lawyer Andrea Michaels.

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Having reached the end of financial year, our thoughts are turning to tax time. It’s the only time of year most of us give a thought to the ATO.

But while most people are mindful to stay within the guidelines, it’s important to crystallise why we need the whole taxation system in the first place, and how it only works if we all play along – both individuals and businesses.

The theory around the social norm of compliance is something called “tax morale” and there have been, even to my surprise, countless papers and studies done on it worldwide.

It’s obvious that without people paying their fair share of both federal and state taxes, we’d struggle to fund hospitals, schools or infrastructure (and yes, I agree some of our tax money seems to be wasted). So we have good reason to try to understand how important it is for us to be an honest lot, and regard tax cheats with disdain.

This is the perfect time of year to check in on ourselves on tax compliance and the level of our tax morale.

It’s not just multinationals causing problems

Firstly, some myth-busting. While most of us shake our fists at the multinationals who have concocted elaborate schemes and cunning plans to avoid paying tax at an estimated to cost Australia of $6 billion per year, the fact is our own little indiscretions actually cost the country a fair whack.

Australians claim around $21 billion in work-related expenses each year, according to the ATO. While most of this is legitimate, figures from 2014-15 show the ATO conducted around 450,000 reviews and audits of individual taxpayers, leading to ‘revenue adjustments’ (read: forcing people to paying what was actually owed) of around $1 billion in income tax. That’s in just one year and that’s just the small group of taxpayers who drew the short straw.

So you can see why we shouldn’t just be complaining about Google or Apple.

Where do we rate on the tax morale scale?

The Centre for Tax System Integrity (CTSI) was established at ANU in conjunction with the ATO to look at issues relating to how the whole system works between government and minions like us and our attitudes to tax policy. It was closed in 2005, but some interesting findings remain.

The CTSI found our tax system works largely because it’s a ‘psychological tax contract’ (CTSI, Working Paper No 76, Feb 2005). It only functions at optimum levels when our collective ‘tax morale’ levels (i.e. moral incentives to pay what we owe) are high – and they usually are because we all understand the drill: pay the tax and the government gets stuff done for us.

But when the general population starts thinking the tax system is unfair, or tax rates are too high, or it’s widely perceived the government isn’t delivering its share of the bargain, then compliance rates reduce.

So, when cultural norms slip and the general consensus says it’s OK to get away with little stretches of the truth on tax returns, we know we’ve hit troubled waters.

That’s when we start claiming the coffees that aren’t work-related, or car expenses start being stretched, or we begin attending conferences that aren’t really a self-education expense. Then it’s time for the ATO to hit the panic button.

I’ll be looking closely at the 2016/17 statistics to see how we’re tracking given recent attitudes to the state and federal budgets. I think we’ll see the high income tax rates coupled with the Medicare Levy hike start to bite into our morale.

The right balance

While we definitely have some tax reforms we need to work on, overall, I’m sure most of us can see the social benefits of maintaining a fair system that continues to function well.

Trust in governments is a key feature globally in measuring tax morale. Maybe Australia might not rate so well right now on the tax morale scale but we need to if we want to get the services and infrastructure we expect from our state and federal governments. Alternatively, we can readjust our expectations and peg them a little lower.

Whatever the right balance is between taxing and government spending, I hope at this time of the year everyone can take a moment to understand why we should pay our fair share, no more or no less, and have a happy new financial year while you’re doing it.

Andrea Michaels is a tax and superannuation specialist and the managing director of Adelaide law firm, NDA Law. Twitter: @michaels_andrea

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