Question

Explain the purpose and components of the Australian tax law system. What are its strengths and weaknesses? How could it be improved? Discuss in relation to any proposals for tax reform that you have read or heard about.

Answer 1

Purpose and components of the Australian tax law system :

§ Purpose

1. The main purpose of taxation is to raise revenue for the services and income supports the community needs. Public revenues should be adequate for that purpose.

2. Tax should, as far as possible, be levied equitably, according to ability to pay. The level of income and assets available to an individual are the best measure of ability to pay, and there is a strong case on equity grounds for higher tax rates to apply to people with higher incomes (vertical equity). Taxes should also, as far as possible be raised at the same level from people in similar circumstances, and people who obtain their income from different sources (horizontal equity).

3. Taxes should be equitable between different generations. As a general rule, people with the same ability to pay tax should pay the same amount of tax, regardless of their age. The system should, as far as possible, be age-neutral.

4. Taxes should be raised in a way that minimises economic costs through tax-created distortions or bias. This depends as much on how revenue is raised (especially consistency of taxation) as the overall level of taxes raised.

5. Taxes should be as simple, transparent and predictable as possible. The system should be designed to minimise compliance costs and to discourage complex and economically wasteful avoidance strategies (for example, complex private trust and company structures).

6. The community as a whole should have a stake in tax reform. As far as possible, the community, in all its diversity of interests and views, should be consulted and engaged in the tax reform process. Major reform will not be universally supported, but it is more likely to be accepted if the community is broadly involved in defining the problems and searching for solutions and conflicts of view are openly acknowledged and respected.

§ Components

1. Income Tax Assessment Act 1936 (ITAA 1936)

2. Income Tax Assessment Act 1997 (ITAA 1997)

3. Fringe Benefits Tax Assessment Act 1986.

a. The 1997 ITAA was originally intended to replace the 1936 ITAA, but currently both Acts still operate concurrently.

b. The ITAA 1997 includes the capital gains tax rules, as gains are assessable income.

1. Goods and Services Tax Act 1999 (the GST Act).

Strengths and weaknesses :

§ Strengths

The Australian tax system works by charging a higher tax rate if you earn a higher income. It is a marginal income tax system.

The Australian Tax Office or ATO is responsible for ensuring individuals, companies, trusts and other entities lodge their tax returns appropriately. The tax system uses a self-assessment program. Therefore, everyone is responsible for reporting their own tax to the ATO each tax year.

There are many forms of taxation in Australia. Individuals and companies in Australia may be required to pay taxes or charges to all levels of government: local, state, and federal governments. Taxes are collected to pay for public services and transfer payments (redistribution of economic wealth).

The Australian taxation system is based on a tiered structure, that is the more you earn, the more you will be taxed. There is a tax-free threshold of $6,000, which you can earn under and effectively not pay any tax at all. The highest rate of tax is 47% if your taxable income is over $62,500 in the year. There is also the Medicare Levy of 1.5%. This is compulsory and must be paid at the time of lodging your income tax return and receiving an assessment.

There is also a hidden Medicare Surcharge of an extra 1%. This applies if your taxable income is more than $50,000 as an individual, or $100,000 as a married couple, and you do not have private health cover, then you are required to pay an extra 1% into Medicare.

It may be worthwhile considering taking out private health cover when you arrive in Australia, as in many cases, if you are required to pay the extra Medicare Surcharge, it normally amounts to at least ½ of the annual premium to join a health fund anyway. Therefore you are going to pay half the annual premium as it is, so you might as well pay the remaining amount and receive private health coverage.

§ Weakness:

The complexity of the Australian tax system hides many loopholes, one of the most unfair is the fact that some of Australia’s wealthiest citizens pay negative tax. The tax office actually pays money to people who have paid no tax themselves, and these people are some of the wealthiest in the country.

It's time this perverse tax loophole was closed.

Only by closing unfair tax loopholes can Australia implement progressive reforms like strengthening the social safety net, building social housing, investing in schools and universities, addressing climate change and improving health care.

About Tax Reform:

1. Successful tax reform is a partnership between Government and the broader community. Governments should set out their goals for reform and provide a framework for consultation, and then make room for community organisations to respond with their own problem definitions and priorities for reform. Governments should then develop specific reform proposals for consultation and provide sufficient time and information for people to assess them. Major tax reform statements should not contain ‘big surprises’, nor should they be released just before elections.

2. Constructive dialogue among diverse interests is needed to smooth the path to reform. Organisations representing a broad cross section of the community have a key role to play, along with individuals with expertise in taxation. Genuine discussion of differences is essential and ‘false consensus’ is counterproductive.

3. We need to agree on the problems before we can agree on solutions A common flaw in tax reform processes is to begin with solutions and work backwards to justify them.

4. The tax reform process should be open and transparent. Reform should be guided by a broadly representative and independent advisory and consultative body and/or a series of public events with broad representation at which Governments and community organisations have the opportunity to discuss their proposals. State and Territory Governments should be invited to fully participate in these processes.

5. It should be informed by the best available evidence. Governments and other participants in the process should be open to debate over the strengths and weaknesses of their reform proposals. Governments have a responsibility to provide the data needed for community organisations to properly assess reform proposals, including their revenue and distributional impacts and efficiency costs and benefits. This could be organised through an independent advisory and consultative body.

6. These processes will not avoid conflict over tax reform, which is inevitable. However, they will strengthen consensus where it exists and make clear to the community the real basis for any differences of opinion so that people can make their own informed assessments. They also make room for Governments to adjust their proposals before they commit, in response to major concerns raised by stakeholders.

7. Successful tax reform is not always achieved in ‘one big package’ It may be best to progress it in a series of packages, each addressing a separate set of problems (for example our steep housing costs and the future costs of population ageing), provided the overall outcome is coherent and based on robust goals and principles.