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The Tax and Transfer System is really the only mechanism we have to balance the books – and with tax reform on the table, now is the time to look at our tax system with new eyes and split the bill in different ways. This needs to include taxes that have been reviewed in recent times, including GST and the corporate tax rate. Everything needs to be on the table to support our businesses to recover and take a stronger stake in the global economy.
In our podcast, National Head of Indirect Tax Tony Windle, and Tax Partner Vince Tropiano discuss how to shake up the tax system and avoid decades long deficit blow outs.
Welcome to Boardroom.Media, my name is Velvet-Belle Templeman and I'm here talking to Tony Windle, National Head of Indirect Tax and Vince Tropiano, Partner in the Sydney tax team. Tony has over 20 years experience in specialist tax services including GST, tax technology systems and tax governance. Vince has over 30 years experience with clients on domestic and international corporate tax issues, including tax risk management. The Prime Minister's Job Maker program puts the onus of recovery squarely on business and one way to support business and investment as well as pay down Australia's record deficit is in tax reform. In the spirit of the new normal and doing things differently, today we're going to talk about how the tax system can be shaken up to achieve the results the government is after. Thanks so much for joining us Tony and Vince.
Pleasure.
Happy to be here today, thanks for that.
So let's get stuck in, tax reform, we've been talking about it for years, Vince what's the difference this time?
The word that seems to have been most commonly used over the last three months is ‘unprecedented’, so we're probably all sick of hearing it and looking forward to the day where we can just have normal conversations. But it comes into play with tax reform as much as every other aspect of our life and working life at the moment. You're right Velvet-Belle, we've been talking about tax reform for decades and there's been numerous studies and reports and the like and at the end of the day there's probably been incremental change, there's been some major changes but GST is coming up to 20 years old. And prior to that things like capital gains tax and the like were 15 years before that. So what's changed now is cost, it's been a very expensive business for the government to help keep the economy ticking over, over the last three months. Under our current system it could take decades to get us back to where we were before all this hit. So it's important that we need to look at a whole bunch of different levers, a whole bunch of different areas to help fund business existence and business improvement and certainly tax reform is always an important part of that. And it really is time that we need to take a serious look at what we can do to improve the tax system.
I think there's a couple of important points there Vince actually and you mention GST. As one of the sad individuals who likes doing GST and has been doing it for 20 years, I've seen a changing landscape over that time and picking up on your comment there about this being unprecedented. We've always had a reliance on inefficient taxes like the state tax and what have you around transfer duty and payroll tax and those themselves create some high compliance costs. But I think now what we've got is a large government expenditure with all of the stimulus programs, a shrinking revenue base as companies are not going to have the taxes or the profits that they were otherwise going to have. And an increased debt to fund all of this; I think the time certainly has come in respect to taking a real hard look at where Australia's tax and transfer system, and I think we might touch on that soon as well, but where that's going for the future, because I think we've certainly got a different state of affairs coming up in front of us there.
I think that's right Tony and Velvet-Belle I saw a study not long ago and there's something like 120 odd taxes and levies and registrations that a company needs to enter into to set up business and continue its business. And something like 90% of revenue comes from about six of them. So there's certainly scope for some serious reform and just making life easier, simplicity is always the other word with tax reform. So there's a need for tax reform and in more ways there's a need to make the whole system a lot simpler for business to continue.
It's certainly going to be interesting to see how it plays out. Now the prime minister has flagged that as most of the relief came from the Commonwealth, so the bulk of the tax reform would be led by the Commonwealth, what levers do they have to pull, Vince?
Well the main ones are always around income tax, there's a heavy reliance on income tax and corporate tax in Australia. Much greater than global average. I think reliance on income tax is about 40% of revenue, corporate tax might be about 14 and I think globally the income tax reliance is around 28, something like that. So they're going to be the obvious areas that need to be looked at. Corporate rates and individual rates are going to be the biggest area for some reform and for funding in the last few months, but allied to that is the other side of the coin in terms of what tax levers can be pushed and pulled to support business as they seek to recover. So the government has a challenge there, but it's got two sides of this, it needs to fund its own activities and it needs to set up a system that will help support businesses to get back on track. But unfortunately the biggest levers at the moment are income tax, corporate tax, GST is a big part of it and then that rolls back into the states. And then I guess we can talk about that, Tony can talk about that to some extent in terms of how we can improve on that. But that's where most of the heavy lifting will need to be done.
You mention the states, they are talking about abolishing stamp duty, but where do they fit into this larger scenario?
From an overall perspective it's really interesting to see the response both of the states and of the Commonwealth to COVID and the stimulus. Certainly the government at the federal level has done a lot of the heavy lifting with the large Job Keeper, Job Seeker, Job Maker programs and in recent times other sort of more targeted initiatives around building industry for example which won't be the last. The flip side of that is that it would appear to some extent other than some sort of more small to medium enterprise business stimulus, the states have actually got off relatively lightly in respect to putting their hand in their pocket. Having said that though, if we're looking at how it is that the states can actually look for reform going forward, we shouldn't lose sight of the fact that GST itself as a revenue is never actually held by the Commonwealth, it's always passed back to the states. So whilst everyone looks to the GST as being a federal tax, yes it is, that it's collected by the Commonwealth, but it's then funded back to the states to meet their own programs or work. The states need to be able to pay for what they do in respect of things such as health and education, which are at their level of administration. However in order to do that there, if they are looking at creating more efficiency for investment and coming out of this post COVID world in a more economically viable manner, certainly they're going to have to look at the likes of the stamp duty and payroll tax, which basically stops people from doing things. It's been long recognised that they are inefficient taxes. But if they are going to drop those down or abolish in some way, which has been some of the commentary coming out of NSW for example recently, they're going to need to fund their activity somewhere else. And I think that ultimately might end up being an enhanced or an increased GST.
So let's spit ball, we know the goal for the government is to remain open and globally connected, and to support businesses to reinstate or create new jobs. How would you rejig the system to do this?
Well there's a few different ways of looking at this and you can start to really think about some inventive ways. The first thing is that we need to provide incentives for businesses to set up here, encourage international investment and at the same time encourage local investment. We need to support businesses getting back on track as well as encouraging investment from overseas. So we talked about these R&D incentives which have been moved back and forward over the years and changes there, but that's an important part of it. Tax rates is always that old chestnut; I mean our corporate tax rate is much higher than global average, we're still up to 30%. UK is down to 18%, US is 21, Singapore is 17%. As I said global average is around 23%. So we need to look at that and that's a challenge, because we're talking about needing to reduce corporate rates and at the same time trying to collect some funds to pay for what's been happening. But we can't get away from the fact that at that level we're not competitive globally and it's important that we continue to be competitive globally. So that's a big part of it. Another area where certainly the ATO and government spend a lot of time over the last few years is multi nationals and how we tax multinationals for their activities here in Australia. That takes up a lot of the ATO's time and they've had some success in terms of collecting revenue from those areas, but maybe it's time to look outside a little bit differently. For example the French have introduced like a global turnover tax and it's aimed towards tech companies, picking them up in terms of turnover. This was the Googles and Apples and the like, but the turnover tax I think has some merit and I suspect it's something which will happen across the globe as each company seeks to tax cross border activity at that digital level, but there may be scope to bring that in at more of an operational level as well. So that's something which I think is something we should consider in more detail. So I know that Europe the EU countries have been looking at this. I know that for example New Zealand have been looking at this. We've talked about it here in Australia, but really some way to provide a simpler platform for taxing cross border activity at a digital level especially. And I know that they actually did some of the reform with GST and the like.
I was just going to say there just to continue on what Vince is taking there, to the extent that what we're looking there is probably the natural evolution of an indirect tax system mark two. Globally the existing value added tax VAT or GST systems around the world have been designed for traditional consumption patterns and everyone is consuming things differently. We've had evolutions to the Australian GST in respect of the Netflix tax which does tax digital content and a reduction on low value threshold, but those are tinkering around the edges. And essentially what we're looking at in respect of maybe a digital services tax or the like and there's probably a couple of different models in that regard, what you're really looking at doing is actually taxing the things as they occur rather than waiting to tax the outcome of the things down the track. So what I'm saying there is you're actually looking at consumption which we know will continue to grow rather than actually taxing profits at the end, which is the result of those consumption. And from an overall effectiveness side of things, tax is like a digital services, potentially feed into the likes of the indirect taxes around the GST and VAT globally. And I think we're going to see a little bit of that certainly here in Australia and I know that there's a number of economies around the world really turning their minds to that.
So Tony we've talked globally, how about locally? How do you support businesses here?
Yeah I've got a bit of a different take on the traditional debate about the GST and traditionally everyone's just looked at okay well let's just increase the rate of GST, we're currently 10%, which as Vince said is a very low comparison that globally that OECD is around 18% in terms of an average there. Traditionally people have also spoken about increasing the base of GST. At the moment we have GST free concessions for health, education and food which actually cost about $18 billion a year to the revenue. So what's to stop us actually looking at both at the same time in respect of the rate and the base and then I guess overlay it with the circumstance that we find ourselves here where state and commonwealth have that natural push/pull tension? So one of the ideas that Grant Thornton's been tossing around is actually increasing the rate of GST, call it 10% up to 15% or even being controversial and going all the way to an OECD average and calling the bat 17.5%. We have an Australian rate of GST of about 17.5%, existing 10% for example that may still be able to be pushed through to the states in order for them to actually maintain the provision of their services. But given we've got another 7.5% of GST to play with, question whether or not we could actually then look at that at a Commonwealth level for almost a hybrid model of GST, where GST is not only received by the states traditionally, but actually also kept by the Commonwealth to pay down some of the debt that they've got post COVID, Job Keeper is costing a lot of money. And also to actually push through stimulus in respect to infrastructure spend, economic development and competitiveness and at the same time looking at the transfer system to make sure people aren't disadvantages. So maybe a 17.5% GST could actually work and maybe also in that regard, actually extending the base of GST out into those items which are traditionally GST free. And I'm not talking about putting GST straight onto things such as the food, the education or health, but there's actually a bit of a half way house that the tax system can adopt for GST, which is what we call input tax. And all that basically means is that there's still no GST on the actual price that you and I pay for those services, but it means the suppliers can't claim GST back for all of their costs associated with doing that. So that might mean for example that school fees go up by you know 5% or 6% or food goes up by about the same amount. That sticky GST is then actually also recovered through that higher rate. So effectively what we've got there is a dialled up GST rates and a base side of things and we can then start talking about the other reforms that Vince was mentioning there in respect to what you actually use that money for.
That's right Tony, I mean I think as you mentioned, the other side of this equation is that the system is to collect revenue and also then to use revenue in its most important form. So it is a tax and transfer system, we do need to consider the more disadvantaged lower income earners and all the rest, so that whatever increases in tax or GST for example which might come up and then lead to at its most basic scenario, a loaf of bread going 25 cents more, which may not be that important for a number of people, but for those at lower income earners and those that may not be paying that much tax, it's important that we take that into account to ensure that the transfer system is appropriately [0:14:25 paying] the deals with the increases of that ilk. And certainly the model that Tony is suggesting is that the pot is increased, but it's used in a slightly different way. The GST pot is used in a different way that the increases would feed through to the federal government to pay for all the other incentives that are required being things like infrastructure investment that will help business get back on its feet. For example the instant asset write off provisions which are due - the larger ones due to expire 30 Jan, keeping some of those kicking along to help business continue. But at the same time ensuring that there's enough in the pot to support those that would be most disadvantaged by something like a material increase in GST. So we need to ensure we're covering both sides of it and I think there is scope to do that.
OK so Tony, what do you think in light of the Finance Minister’s comments that the GST is off the table in terms of tax reform?
Look at this point in time, traditional views do need to be re-examined in the current environment, and any analysis undertaken pre-COVID surely must be considered again. Given the unprecedented environment we’re in, I think all major taxes need to be on the table and GST is a major tax. I think the government’s missing a trick by not dealing with this without GST in there. Its almost like, and I used this analogy the other day, its almost like a golfer going out on the golf course with a full set of clubs and then deciding not to use the driver but instead tees off with a putter.
Certainly sounds like a lot of support for businesses, but it doesn't sound like it's helping to pay down this massive deficit. What's the trade off?
You know we're arguing the case for income tax reductions. I started off by talking about that and that's certainly something we need to be internationally competitive and there has been movement in that area both at a corporate level and an individual level. So I guess there's a risk that some of those planned reductions may need to be deferred. That's not idea, but there may be an issue that it needs to be deferred for a period of time and previously we've also talked about - well considered the need for things like a special levy. We've had those in the past with various events and there may need to be a short term levy for a period of time to help support the costs of getting through the last three months and also probably the next six to 12 months we're expecting that there will be a downturn as businesses start to get going again. It's not going to be you know everyone goes back to work on the 1st of July and everything will be what it was at Christmas. We're expecting a slow time of it. Treasurer has come out and talked about us being in a recession, so there's some long term activity required here and it may result in some increased taxes and levies in the short term.
So what do you think we will see from the government between now and October? Some of the usual tinkering around the edges or will we throw the baby out with the bath water and start again Tony?
I think Velvet-Belle I think we're going to see the usual sort of wish list and self interested lists of demands and requests from a number of different industries. Those that talk loud get looked after potentially. I certainly hope that's not the case in respect of the squeaky wheel being oiled, but I can certainly see from a targeted sector side of things that wish list and those peak industry bodies and unions saying what they want to see, there'll be a lot of lobbying and politicking put out there by those organisations. I think what's important though and the international monetary fund the IMF, that actually came out and said look there is a tendency for all the companies and economies to really move too quickly in respect of tax reform. It needs to be considered, so knee jerk reactions you know the likes of what we've seen in Saudi Arabia increasing their GST by three fold from five to 15% just because there's no oil revenues anymore, those sort of activities whilst not relevant necessarily or immediately replicable here in Australia, we certainly want to make sure that we stop, think and consider what the long term piece is. Again we've got a burning platform at the moment, we haven't had meaningful tax reform for 20 years, we've had a whole lot of talking about it with no real action. So certainly I think from a wider political will, the time for change is now. I think the Australian population is expecting it and I think the Australian tax payer can sit there and actually think positively about a future where you know the actual response to COVID is one which is actually going to set Australia up for a success.
Tony and Vince thank you for your time.
Thanks very much Velvet-Belle.
You're welcome.
