Our Tax System on the world stage

by Paul Hockridge Partner Paul is a Tax Partner with over 30 years' experience in tax, asset protection, estate and succession planning, FBT and salary packaging and property development. Paul specialises in advising high wealth families and closely held businesses as well as accounting and law firms. Contact Paul

The media coverage of the US income tax rate reductions is a timely reminder of how massively we are out of step, not just with the US but with 7 roughly comparable OECD (Organisation for Economic Co-operation and Development) countries. Our corporate and personal income tax rates are far too high and our rate of GST is much too low, based on these comparatives.

Are we likely to see major tax reform in a period when neither major political party has a resounding majority? It seems unlikely.

On the other hand, rather than focus simply on the headline tax rates, remember that deductions and allowances significantly impact the effective rate that we pay.

A robust and well-informed debate on negative gearing would be healthy. There are still widely differing views on the impact that change would have on residential housing supply and prices.

Condemning multinational corporations has developed into a sport, both in Australian and overseas. Has new legislation in Australia (or elsewhere) solved the problem? Clearly not.

Why does the problem continue? Some countries impose taxes based on the residence of the taxpayer. Other countries focus on the source of their income. We consider both. The unresolved dilemma facing every jurisdiction is how governments determine the appropriate amount of tax to be paid in each country. For example, an Australian consumer might buy online from a US company, which developed its website and IP in Ireland, hosts it’s server in Singapore, fulfils your order with goods manufactured in China and delivers via a Hong Kong shipper, and etc. No country has devised a simple and equitable set of tax rules to solve the problem of how to split the profit and share the tax.

Massive movements of refugees and the transfer of large amounts of capital by States and successful individuals have seen a rise in nationalist movements around the world. One of the consequences, not just in Australia, has been a tendency to seek to restrict investment by non-residents and to tax them at penalty rates.

Governments have argued that high rates of (stamp) duty on purchases of real estate and the imposition of punitive rates of land tax help to contain property prices by discouraging foreign purchasers. If this is so, these punitive taxes might be appreciated by resident purchasers who find it easier to enter the market but perhaps not by sellers or developers, who rely on foreign investors. This dilemma is a classic demonstration of there being two sides to every coin.

Will we see an end to our dividend imputation system, or at least a significant modification? If and when we better align ourselves with the other 7 OECD somewhat comparable tax systems, perhaps we will. We are currently somewhat out of step in this regard.

Will we see a reduction in the 50% CGT discount for the same reason? Perhaps so, for the same reason but hopefully not until our personal income tax rates come down substantially.

Will we see the reintroduction of estate and probate duties? Not if we follow the international trends. Where these taxes exist, they collect a tiny percentage of the overall tax take, as firms like Mutual Trust are invariably engaged to preserve each family’s wealth for the next generation.

As pressure mounts for fundamental tax reform, hopefully we will see a somewhat more informed debate.

Mutual Trust Pty Ltd ACN 004 285 330 (AFSL 234590). Liability limited by a scheme approved under Professional Standards Legislation. For participating members (other than for the acts or omissions of Australian Financial Services Licensees). This information is general in nature and subject to change. It does not constitute tax, legal or financialadvice. We recommend you seek advice specific to your circumstances before taking any action. Copyright © 2014 Mutual Trust Pty Ltd.
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