Noel Whittaker is the author of Wills, Death & Taxes Made Simple and numerous other books on personal finance. Email: [email protected]​

For the umpteenth time, tax reform is back on the agenda as the centrepiece of Treasurer Jim Chalmers’ latest talkfest aimed at boosting productivity.

Chalmers is now positioning himself as a crusader against red tape, but it’s hard to take that seriously when the Albanese government has introduced 5,000 new regulations in its first term, according to recent reports.

There’s the usual story of wasteful government spending at every level, but the deeper issues lie in changing demographics.

The number of non-taxpayers is rising rapidly as more of the Baby Boomer generation of Australians retire and live longer—90% of retirees pay no income tax at all. Add to this our skewed personal income tax system, where just 12% of taxpayers are footing 62% of the bill, and the imbalance becomes clear.

How do we fix an ‘imbalanced’ tax system? Image Credit: Shutterstock

Just look at the current system. Once a person earns $135,000 a year, they start losing 39% of every extra dollar. That jumps to 47% once they earn $190,000. These are not very high-income figures by today’s standards, yet we’ve created a tax system in which someone earning over $190,000 loses almost half of every additional dollar.

There’s something fundamentally wrong with that: it shifts the focus from earning more and being more productive to finding ways to minimise tax—and that’s a dead weight on the economy.

The problem is that most taxation changes are difficult to implement.

For years, there’s been talk about eliminating the capital gains tax exemption on the family home, but that’s a practical impossibility. No government would dare to do it, and even if they tried, the massive disparity in house prices across Australia would make it unworkable.

There’s also ongoing discussion about reducing the capital gains tax discount on assets held for more than 12 months, but again, implementation is tricky.

It’s a fundamental tax principle that you shouldn’t tax inflation, yet removing or substantially reducing the CGT discount without addressing inflation would do just that. And if a change was phased in by applying the change only to assets acquired after a certain date, you’d see a frenzy of purchases before the deadline, followed by a slump.

There are a lot of leads when it comes to streamlining our tax system. The question is: which one causes the least upheaval? Image Credit: Shutterstock

The result? Distorted markets, disrupted planning, and more confusion than clarity.

Super is always a target, and now there’s talk tthat he government might slap a 15% tax on some pension-phase accounts that are currently tax-free.

But there’s a major flaw in that plan: super’s purpose is to provide retirement income, and it does that by creating a low-tax or zero-tax haven. A couple with $800,000 invested in their own names would pay no tax anyway, thanks to offsets and franking credits.

Tax their super, and they’ll just pull the money out and invest it themselves.

As always, there are rumours about changing how family trusts are taxed. Many of the country’s wealth producers run small businesses, and with so many going broke in the first five years, asset protection is a top priority.

Businesses run as a sole trader or in a partnership, leave all your personal assets at risk if things go wrong.

That’s why most business owners use a trust or company structure. A trust doesn’t pay tax itself; it distributes profits to beneficiaries, who are then taxed at their marginal rates. While trusts do offer some tax advantages, these are limited for most business owners.

Typically, the beneficiaries are mum, dad and the kids, but distributions to children under 18 are taxed at the top marginal rate once they exceed $416 a year. With the 30% tax bracket now stretching to $135,000, there’s little point in targeting trusts with a special tax—owners would simply start paying distributions as wages instead.

All things considered, practicality might be what makes most sense in tax scheme changes. Image Credit: Shutterstock

The practical solution is to increase GST to 15% with no exemptions. That would strike a blow to the black economy and ensure retirees contribute something towards the rising cost of supporting them.

Any GST increase will be slammed as regressive—hurting the poor more than the rich—an argument that applies to most embedded taxes. Petrol tax, liquor excise and cigarette duties are all regressive, yet these are widely accepted.

The strength of GST is that it’s almost impossible to avoid: it captures a large slice of the cash economy and, while it hits low-income earners hard, it hits big spenders hardest—the more you spend, the more you pay—so those with the most disposable income typically pay more.

About the author: Noel Whittaker, AM, is the author of Wills, death & taxes made simple and numerous other books on personal finance. An international bestselling author, finance and investment expert, radio broadcaster, newspaper columnist and public speaker, Noel Whittaker is one of the world’s foremost authorities on personal finance. Connect via Twitter or email ([email protected]). You can shop his personal finance books here.

Advice given in this article is general in nature and is not intended to influence readers’ decisions about investing or financial products. Always seek professional advice that takes into account your personal circumstances before making any financial decisions. The views expressed in this publication are those of the author.

 

[Sir Greg01]

This may be too simplistic, but why not have a basic system where everyone working pays a 20-cent-in-the-dollar tax above a threshold level? Companies/ corporations pay 30 cents in the dollar tax, once legitimate costs are removed. Charity donations and welfare donations are tax-deductible. Pensioners/Self-funded retirees over 65 pay no tax on money paid under $50k per financial year, then 10-15% tax above that. All social pensions, ie youth allowance, be revisited and done away with where possible, unemployed allowances, etc, all pay 10cents in the dollar tax after a review and possible increase. All refugee payments and benefits stop after 1-2years, which is a burden; they must pay tax as well. Child support is considered pre-tax salary sacrifice, and the recipient pays tax on the received payment. I know some haters will disapprove of this and much I have written here, but we need a discussion. All current and former political/political based pensions come under the same laws as everyone else. They wait to receive payments not be entitled to public funds.

 

[Gregory Breden]

Noel, many thanks for your invaluable advise.

Kind regasrds,
Gregory Breden(JP Retired)

 

[glennkidd]

"90% of retirees pay no income tax at all. Add to this our skewed personal income tax system, where just 12% of taxpayers are footing 62% of the bill, and the imbalance becomes clear."

Cut spending and red tape.
We "Oldies" worked all our lives, paid tax, saved, lived relatively debt free, didn't take any Govt handouts ( first home grants, familily child allowance, childcare.. etc etc).
We were encouraged to save for our retirement, and now the pot is fair game to greedy, useless politicians.

 

[Jan A]

Theoretically, the large spenders with large incomes would pay more GST. However, large spenders tend to be eligible for GST registration through their companies or “entities” (as defined for GST purposes) and are then able to channel their spending through their “entities” and claim back at least some the GST they pay out. Individuals who spend less tend to be at the lower income end, do not have companies or can be otherwise defined as “entities” for GST purposes, making them ineligible to claim back any of the GST they pay out. GST shifts the tax burden to the lower end of the economy because they have no means to claim back what they pay out.

GST is classified as an “indirect tax,” meaning you pay it when you purchase other things. Because it is a percentage of the price, when prices go up so does the GST. Inflation is a boon for government as they receive more money from GST.

GST was brought in by a Liberal government, after a promise by the then PM, John Howard, that we would “never, ever have a GST.” It replaced the former Sales Tax which was a much fairer tax. It was only some goods that were subject to sales tax. Under Sales Tax, the rate at which goods were to be taxed was set out in 4 or 5 schedules (the number changed towards the end). Goods that would be considered essential were not subject to sales tax and were listed in the lengthy exemption schedule. This schedule exempted a wide range of goods including books, most food, wedding rings (with no stones), baby goods, sheet music, magazines, medicine, petrol (yes, there was no sales tax on petrol).

Importantly, sales tax was charged on the final wholesale price of the goods - not the retail price which is exponentially higher. For example, ordinary pens that are manufactured in their hundreds of thousands might sell at the wholesale level for 10 cents each. The sales tax on one pen at 10 cents would be about 2.2 cents, but the price of the same pen at the retail end would be about $2, with a GST at 10% of 20 cents. The sales tax on a book costing $30 would be $0, but GST would be $3. The sales tax on a second hand car costing $10,000 would be $0, but the GST is $1,000. The sales tax on the service of installing a driveway in your home for a cost of $3,000 was $0, but under GST, the tax is $300. Under sales tax, a year’s petrol costing $2,000 would be $0, but under GST it is $200. Under sales tax, all food for human consumption was exempt (except for snacks like chocolate and crisps which were subject to the lowest tax rate). Under GST, some foods are exempt, mainly those to take home and cook, like vegetables or raw meat, but everything else is taxed at 10%. Of course, those who can claim all the GST on these expenses through their “entities” pay a much reduced GST compared to those who have no means of claiming it back.

In the end, the introduction of GST and the elimination of sales tax resulted in people paying up to 20 times as much indirect tax as previously. At the time of the introduction of GST, the government advertisements managed to confuse everyone with percentages, saying GST was a lower percentage than sales tax, but the quoted percentages were not calculated on the same thing.

GST does little to reduce the “black economy” insofar as it encourages providers to work for cash. The provider does not charge the GST to the customer who is happy to have a discount and the provider reduces their recorded taxable income accordingly. The customer pays no GST and the provider pays no tax on the income for that job.

Beware of the myth that either major party would have brought in the GST. Under the previous Labor government, a proposal for a GST was rejected by the Labor Caucus as moving the tax burden to the lowest end of the economy. It was brought in under a Liberal government but clearly the current Labor government has done nothing to remove it or reduce it to benefit lower income people. Any goods and services tax is virtually a licence to print money. For all their trumpeting about how terrible the cost of living is for people today, the government continues raking in the money with joyful abandon.

 

[Phantom55]

gst was supposed to get rid of all the other taxes.........it didn't ...it changed the name "tax"and increased the fees /prices accordingly, "sales tax/stamp duty.."went from 2-3% to 10% gst... govt NEVER get rid of a tax, they just change the name of it. eg levee, surcharge ,penalty ,registration fee, handling fee. etc....if the truth be known the 10 % gst would be worth more than all the other taxes combined, and they could have been abolished, like they stated, but they just couldn't help themselves't

 

[Jan A]

The Liberal government claimed that GST would replace Sales Tax and “stamp duty”. They did not clarify that “stamp duty” did not refer to housing but to stocks and shares. In other words, the wealthy who had money in stocks and shares benefitted from stamp duty being removed while the average person was hit with a huge increase in indirect taxes.

 

[Rain72]

A better approach would be to slash the waste. Stop handing out to people who don't need it. Subsidised childcare for families earning over a quarter of a million per annum. Paid parental leave to wealthy families. Mega billions to the Indigenous, to achieve zero reduction in 'the gap', but line the pockets of rich activists. Huge handouts to immigrants. Massive salaries and pensions to politicians and senior bureaucrats.
And that's just the tip of the iceberg. The government doesn't need to steal more money from citizens. It needs to manage the money it gets efficiently.