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Brace yourself for (bad) tax and super news

Last week in Firstlinks, Dr Shane Oliver enlightened us on how the anticipated increase of $500 billion in public debt due to the COVID-19 crisis will be paid for. The $200 billion in spending contained in the three stimulus packages offered by the Morrison Government plus the hit to the public revenue of $300 billion through reduced taxes from the economic downturn will be funded via the issuance of government bonds and additional borrowings.

However, in his concluding comments, Oliver briefly mentioned that long-term consequences may include forgoing the next round of personal income tax cuts due in 2022 and the imposition of a deficit levy. These options and others are explored in this article.

Notwithstanding the terrible human cost of the pandemic and the impact on many people’s livelihoods, we should be prepared for more financial pain once we get through the immediate threats posed by the pandemic. While this week, Scott Morrison reaffirmed that once the crisis is over, the Coalition Government will be returning to ‘conservative economic policies’, the sheer magnitude of the generous responses coupled with the economic downturn will leave a significant financial bill to pay.

Treasurer Josh Frydenberg has indicated the debt will be repaid over the long term. We must brace ourselves for changes in the taxation and superannuation systems as everyone will be expected to play a role in the economic recovery. However, a substantial slice of the burden will likely fall on the shoulders of high-income earners in addition to that already being borne by landlords not classified as high-income earners.

Likely tax options for repaying debt

Assuming the current bipartisan support shown to date in quickly passing stimulus packages through Parliament, two obvious reform options likely to pass relatively unchallenged would be the unwinding of the legislated personal income tax cuts and the revival of the ‘Budget Repair Levy’.

First, in the 2019-20 Federal Budget, the Government stated that ‘disciplined financial management’ has allowed it to enhance the ‘Personal Income Tax Plan’, providing a further $158 billion of further tax relief to most Australians. Clearly, the underlying premise for this policy has changed quickly and dramatically. Under the current plan, in 2022-23, the 19% threshold will increase from $37,000 to $45,000 and the 32.5% threshold will increase from $90,000 to $120,000. Then, in 2024-25, the 32.5% marginal tax rate will reduce to 30% and the top threshold will increase to $200,000 and the 37% tax bracket will be abolished as outlined in the tables below.

Source: 2019-20 Budget documents

The result would be a simpler system comprising three tax rates and a better alignment between the middle tax bracket and the corporate tax rate of 30%. The Government claims these changes will maintain a progressive income tax system, improve incentives for working Australians and contribute to a strong economy. However, pandemic-induced budget deficits bring the affordability of these measures into question.

Second is the resurrection of the ‘Temporary Budget Repair Levy’ brought in to address budget deficits incurred in the wake of the Global Financial Crisis. That tax applied at an additional rate of 2% to personal taxable incomes in excess of $180,000 per annum and lasted from 1 July 2014 to 30 June 2017. The levy was expected to affect 2.3% of taxpayers with taxable incomes in excess of $180,000 (around 400,000 taxpayers) and raise $3.1 billion. This option is relatively easy to implement quickly and could apply from as early as 1 July 2020.

Superannuation also a target

Another option is to cancel the legislated increase in the superannuation guarantee charge (SGC) rate. The current 9.5% rate is legislated to increase to 12% by 2025 in a series of annual steps as outlined in the table below.


Source: ATO

Some, including the Grattan Institute, have strongly argued against this increase on the basis that it effectively comes out of employees’ earnings. Putting that argument to one side, cancelling this increase would ease the financial impact on many businesses and may provide incentives for them to hire additional employees.

Another option might be to tap superannuation funds, despite the $3 trillion held in super before the crisis taking a beating due to stock and bond market declines. This could take the form of an increase in the current concessional tax rate of 15% on fund earnings or even the reintroduction of taxes on certain benefit payments.

Currently, pensions and lump sum withdrawals from the superannuation environment are tax-free to those over 60 years-of-age from funds that pay tax. An argument could be mounted on equity grounds that it is only fair this cohort shoulder some of the financial burden.

Ability to introduce unpopular measures

There is a saying in politics ‘don’t let a good crisis go to waste’, and in times of crisis the Government may be forced to implement otherwise unpopular measures in the best interests of all Australians. These reforms may even include some of the politically unpalatable options put forward by the Labor party in the lead up to last year’s federal election.

Those measures included, among others:

  • limits to negative gearing
  • halving of the capital gains tax discount (from the current 50% to 25%)
  • eliminating the refundability of franking credits.

The Parliamentary Budget Office had costed the first two measures to raise $35 billion over the next decade while the policy regarding franking credits was estimated to save $59 billion over the decade. These reforms were discussed extensively in Firstlinks and in the wider public domain and arguably had a significant role to play in Labor’s poor election result.

Nevertheless, given we are in uncharted waters, it is possible that the potential to raise large amounts of revenue from these reforms, some could be resurrected by the Coalition Government, albeit in modified form, under the guise of fiscal necessity.

It may also be possible that the most profitable companies will be expected to shoulder a slice of the burden. This should come as no surprise since the Federal Government has focused on supporting businesses during the crisis by relaxing stringent insolvency laws and through the provision of a wage subsidy. Therefore, additional options may be on the table, such as the imposition of a ‘super profits tax’ on the most profitable companies. This would take the form of an additional tax on top of the 30% corporate rate paid by larger companies. However, such a measure would be relatively pointless if it is not implemented in combination with a partial or full scale back of the refundability of franking credits.

Other potential reforms have not been discussed on the basis that they would simply be too politically unpalatable. These include increasing the rate of the GST to bring our system more into line with those of like nations such as NZ (15%) or the UK (20%) or eliminating some of the exemptions currently available, or the introduction of an inheritance tax similar to that in place in the UK.

Be prepared for hits

The Federal Government will face a delicate balance between raising much-needed revenue to manage the extraordinary budget deficit while providing enough incentive and stability in the economy in the post-coronavirus world. No doubt, financial planners are currently focused on assisting their clients navigate the myriad of Government financial assistance on offer, plunging portfolio values and uncertainty around income in the short term.

This is definitely the right approach for now. However, the key message for advisers in this article is that they should also keep an eye on what may eventuate in the medium term so they can be on the front foot if the tax-related darkness at the end of the COVID-19 tunnel arrives as expected.

 

Dr Rodney Brown is a Lecturer at the School of Taxation and Business Law (incorporating Atax) and a member of the Centre for Law Markets & Regulation at UNSW Business School. This article is based on an understanding of the rules at the time of writing.

 

32 Comments
Geoff
April 23, 2020

I agree with raising GST as it is an effective way to capture tax on spending given the long history of creative ways to avoid/evade income tax (and the industries that depend on dispensing advise to do this) - include allowance to compensate genuine disadvantaged and how to better target black economy.

Peter
April 14, 2020

Is this a debt to be repaid by the community or is this the government increasing money supply and lending money to itself.
I think Modern monetary theory should have a role here and the gov will most likely be paying interest to itself on its own debt, two accounting entries should do the job here to heal the books.

Ramani
April 15, 2020

Not being a book-keeper, I do not understand this argument.

Does it mean that because the $500 billion bill is intended for Australia, and some parts of Australia (who invest in the bonds) will be paid by other parts (largely the taxpayer, as well as those being given repayable loans) that it is a zero sum game, no problem? On this logic, if the stimulus was $500 trillion it shouldn't matter?

If my understanding is correct (hope not) we can solve world poverty in a moment: the world issues zillions of debt funded by some who are in the world. In total, there is no burden, and Ethiopia would be on par with Edinburgh.

Can experts in public finance (including Ponzis) and accounting (including creative) clarify please.

Tony
April 13, 2020

Increases in the GST are inequitable to self funded retirees, in particular, because the once off inflationary effects will devalue their savings and it is difficult to compensate them for this because they may not be in the tax or welfare systems.

Darren
April 14, 2020

Whilst I am in favour of the lockdown (although we didn't do it quick enough), I would argue that the lockdown was inequitable to those under the age of 50, and so the older cohort should shoulder more of stimulus repayment pain than the younger generations.

Ramani
April 12, 2020

Like an unexpected family tragedy that must be coped with limited information and resources, we should hope that COVID-19 would provide policy-makers the intestinal fortitude to slaughter some sacred cows, by making it obvious that handouts and subsidies are paid by the average taxpayer a lot poorer than those who benefit.
Examples:
The exclusion of family homes from Centrelink payments (without a corresponding ability to clawback payments from potential inheritors), the absence of gift tax making wealth and taxable income transfer easier, the ease with which super can be treated as an estate-planning device (instead of for the sole purpose of savers' retirement), limitless tax-exempt pensions funded by tax-free growth.
In normal times any attempt to reform them would be political suicide, but could there be a hope that they may be open to scrutiny?
Governments can ride left-field events better than individuals and businesses, but there are limits. As Robert Mugabe's Zimbabwe showed.

Richard
April 13, 2020

Agree with the inclusion of the family home in the assets test. I put a submission in to the Retirement Income Review. In simple terms couples/singles with the same assets should get the same pension. Assets to include the family home and total superannuation balances. Assets are essentially interchangeable. You can buy a home/sell a home etc. etc. Also argued for a universal age pension but with clawback for the "wealthy".

Bob Reid
April 12, 2020

As a self-funded retiree, it really peeves me that banks are being told to suspend dividends. APRA should just be reminding banks they need to consider their capital positions when declaring dividends and leaving the rest to the boards.
Any changes to franking credits should be on an all or none basis. An important inequity I saw in the Labor proposal was that it gave those with tax payable on other income that could be offset with franking credits a greater return on the same investment risk than the return received by those without other taxable income.
An increase in GST with associated support for those on government pensions etc is surely the fairest way to go to pay for some or all this.
If retirees superannuation must be taxed, a tax on benefits paid may the fairest way to go.

John
October 01, 2020

Once a tax is imposed on superannuation pensions, which you suggest is the "fairest way to go", why would anyone make voluntary contributions when taxed on entry, accumulation and exit? Surely, it would be smarter to contribute as little as the law allows, while building faster taxed-advantaged assets, like the best home you can afford.

keith murphy
April 12, 2020

the visible cost of GST to consumers is 10% ,the hidden cost occured when the government introduced GST and immediately abandoned all forms of price control ,so that businesses were encouraged to charge higher prices to increase GST takings.the higher the prices go the more GST revenue

John
April 12, 2020

If there is one thing that can be guaranteed after the virus is beaten; that already high-taxed individuals and self-funded retirees will once again be told that they will be the ones who must bare the biggest burden when it comes to paying back Government debt. Here we go again. Rinse and repeat.

Andrew Tilt
April 12, 2020

A turnover tax on foreign owned companies trading in Australia would be both ethically and politically justified. As we know, the largest of these, such as Amazon and Apple take all the benefits of trading in a stable and predictable Australian environment but say thank you by minimizing their tax as low as possible.

In the current CV19 crisis, they are gaining the benefit of government handouts supporting their employees and thereby assisting their business operation.

It is time to give something back and the higher debt-reduction tax requirements make this move logical.

As a side benefit, we may see more mid-range companies seeking to avoid foreign ownership classification by keeping offshore shareholders below 50%. A positive move for to encourage more retained Australian control.

Richard Patterson
April 11, 2020

Out of all the free hand outs and I mean free, everything is now free. Completely reliant on the Government handouts. Retirees and especially self fund retirees NOTHING Superannuation NOTHING and here we go again the peple that have put in the hard yards are going to be penalised again. The majority of the people receiving these benefits will not be in a position to contribute to repaying the Debt as it would appear that a lot of these business and people have gone broke in the last month so the Government will have a huge task of getting people off the bottle and back to basics working for a living and saving, no not saving as you only get penalised for
doing that. I am really sorry and sad that Capitalism, Hard Work, Incentive to Save and Secure a Future for your family is no longer part of Australia. It is really distressing that it takes this terrible pandemic to see the state of the nation and the bubble that we were living in and now the same rhetoric is being rolled out again. A new tune is needed.



Marshall J Kimber
April 09, 2020

War Bonds were an answer to finance earlier war efforts. Perhaps they could be part of the answer to finance the war effort against Coronavirus. Interest rates are currently low. Long dated bonds could be issued with a rate of 3.5- 4% fixed, then work on where and how to raise the money to pay down the debt on a principal and interest basis over a 30 Year period.

Allan Gardyne
April 09, 2020

Moving to a cashless society? Easy pickings for a desperate Government. How many of us have NOT had work done by a tradie and been offered a significant discount for cash? How many of us have NOT encountered a small business owner who boasts about regularly slipping a few undeclared dollars into his own pocket?

Also, it has the benefit of being able to be sold to voters as a way to crack down on druggies and tax dodgers.

Roland
April 09, 2020

What about the ethics of the tradie not paying tax?

Greg
April 09, 2020

To manage the debt problem we must stimulate the economy by increasing productivity-
1) reduce personal tax rates on incomes below $200,000 to encourage entrepreneurial initiative
2) maintain the current GST rate, as to increase it only encourages the black economy.
3) reduce overheads by significantly cutting back on public service numbers.
4) encourage immigration from countries whose people have similar values and educational levels

Max
April 09, 2020

Couldn't agree more. Particularly Point 4.

Michael2
April 11, 2020

Cutting taxes, what you are saying there further sends us down the path of the USA

Smaller government reduces good jobs available, and creates long queues in a crisis

Let's not go there

Donald Coutts
April 09, 2020

Would like to see franking credits ONLY used to prevent double taxation of dividend income, the way it was originally intended. Would love to see multinationals operating in Aus. Being subject to a turnover tax based on a percentage of GROSS income in Aus. Instead of income tax. Might help level the playing field for Aus companies who have to pay higher income tax because multinationals pay little or no tax in Aus.

Geoff Ettridge
April 12, 2020

You have hit the nail squarely on the head. Billions and billions of income tax is avoided by multi-national companies simply because the authorities are too politically correct to apply the income tax laws as they are applied to everyday normal taxpayers. It seems as though the tax pickings are exactly like picking fruit. Target the lower hanging branches (the easy pickings) first!

Maurie
April 09, 2020

Real tax reform only comes by broadening the tax base. Hawke/Keating got the ball rolling in the 1980s (taxation of capital gains & fringe benefits) and Howard/Costello oversaw the replacement of a fragmented sales tax system with a more pervasive Goods and Services Tax. Beyond these reforms, the tax system has been largely tinkered with at the margins by successive Governments. May be the time is coming for more base-broadening type reforms. With life expectancy on the rise, how long can a country like Australia maintain a tax-free system for retirees over 60 years of age while the government goes deeper into debt. The catch phrase "We are all in this together" is not only relevant to the health crisis but also the emerging debt crisis.

Carolyn
April 10, 2020

Just a comment on the line about a 'tax-free system for retirees over 60 years of age'.

Not all retirees are wealthy enough to be able to easily take another hit to their income/capital. Only 20% of baby boomers will have enough to live on without recourse to government assistance. They earn very low interest rates on any term deposit investments (if they have any investments at all); if they invest in shares or funds they have been hit by the stock market collapse; and due to 'age prejudice' they do not find it easy to find jobs if they need more income to survive.
The average balance for a man approaching retirement last May was about $300,000. For a woman it was $160,000. How long does that last? Financial planners say that $50-60,000 per annum is needed for survival.
I can't see how it is therefore equitable to increase charges for retired people as outlined in this article, eg like taxes on lump sum withdrawals.
It would be more equitable to charge only those with VERY large superannuation balances for lump sum withdrawals, or to tax them in other ways. But for the AVERAGE person in, or approaching, retirement, it would be just another hit to their income, to their capital and to their dignity.

Michael2
April 11, 2020

The government reduces its debt burden by targeting an inflation rate.

But to target an inflation rate steadily erodes the value of people's retirement savings.

This drip by drip take from retirees is something that often gets overlooked by people saying retirees live tax free, in fact it gets very little focus at all

Targeting an inflation rate is a form of tax on those not working

Pat
April 12, 2020

Interesting interpretation of equitable!!

Cam
April 09, 2020

Labor's franking credit policy was a failure of equity. A similar saving could occur if every person and entity was only able to use say 80% of franking credits. That means everyone is affected equally.

Bakker
April 09, 2020

Is there not a problem with the GST in that it is collected by the Commonwealth and then nearly all distributed to the States ?
May need some form of legislation to ensure that any incremental increase is set aside for national debit reduction....Should not be difficult .if that’s the way they want to go.
Personally, the reintroduction of the budget restore levy would make more sense.

Max
April 09, 2020

A small increment would not be too much to expect. Also Negative Gearing should be kept , but for one property only.

Bill W
April 09, 2020

Given the level of GST (or its equivalent) levied in other countries, it is an obvious consideration for Australia. Also applying GST to fresh food would repair an anomaly that was introduced for all the wrong reasons.

Graham Hand
April 09, 2020

Hi Samuel, we will come out of this with a trillion of debt. I think, for a long time, the economy will need nurturing and added taxes will be a burden. But some time they will come, and the GST will be on the cards. It's one of the questions in our survey, and over half respondents expect a higher GST.

Con
April 12, 2020

1.Greater efficiency at the top-do we really need 3 layers of Govt., with its associated bureaucracies & inefficiencies?
2. Greater productivity and self sufficiency through well targeted incentives.
3. Broader tax base that targets consumption rather than success.
Con

Samuel Drayton
April 09, 2020

No one mentions increasing the GST. Is it being considered in the back room?

 

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