Australia’s New Leader Dusts Off a Tax Plan Snubbed 10 Years Ago

As a newly-elected Australian lawmaker a decade ago, Malcolm Turnbull wrote an unsolicited 52-page proposal to reform the tax system. The report and its 281 recommendations were dismissed by the government and his costings called into question.

Now, a month after replacing Tony Abbott as leader of the world’s 12th-largest economy and enjoying a surge in opinion polls, Turnbull, 60, is turning back to tax, saying he’ll prioritize an overhaul to shore up revenue as Australia lurches into an era of slower growth. The current system leans heavily on income tax and the country has some of the highest tax rates in the developed world.

There’s been little political appetite for structural changes to tax since 2000, when a 10 percent levy on goods and services sales was introduced amid public opposition. While tackling the complexity and limitations of the current system could lure investment and boost business confidence, it may also unsettle voters — particularly retirees — worried their tax burden could increase less than a year before the next election is due.

“The system is a mess and it’s made Australia uncompetitive in a lot of areas,” said Stephen Walters, chief Australia economist at JPMorgan Chase & Co. in Sydney. “While it’s excruciatingly difficult to get done, every piece of the tax system needs to be put on the table and studied, and changes made from there.”

Income Tax

Australia’s top rate of personal income tax is 49 percent, compared with a global average of about 31 percent, while the 30 percent corporate rate is above the OECD average of about 25 percent. A narrow tax base is showing up in waning government revenue; on the flipside some concessions, especially for wealthy retirees, are regarded by lower income-earners as overly generous.

Business groups are lobbying for lower company taxes and less reliance on levies imposed by states and territories, with 64 percent of firms say they face a medium-to-high regulatory burden from national taxes. Australia ranks behind 103 other countries in a World Economic Forum survey of global competitiveness of tax rates.

Yet under Abbott, broad tax reform was effectively kicked down the track as he ruled out altering levies on the private pension system, or amending the GST. Those proposals are back on the table under Turnbull, who may have more room to maneuver after boosting the coalition government’s poll ratings since taking the helm.

Turnbull, in the 2005 paper co-authored with Australian National University demographer Jeromey Temple, examined almost 300 different sets of tax changes, including varying rates and thresholds, and found that significant base broadening measures and simplifying of the tax structure was doable.

“We can afford to lower our tax rates, simplify our tax system and reduce the heavy burden of compliance and red tape on Australians,” he wrote in the paper.

The International Monetary Fund warned in June that a failure to modernize the system, among other needed reforms, would see the economy’s potential growth rate slip to 2.5 percent from above 3 percent. Secretary to the Treasury John Fraser, the top economic bureaucrat, said in July that Australia needs “to look beyond our own nose and accept that structural change is sometimes painful,” otherwise it faces a possible future of declining living standards.

Australia still relies disproportionately on income tax by developed-world standards. About 57 percent of total tax revenue comes from income, 24 percent from the GST, 9.3 percent from property and 5 percent from payroll tax. In the U.S., income taxes make up 47 percent of all revenue, payroll tax 34 percent and corporate tax 11 percent.

Leadership Turnover

Plunging commodity prices are exacerbating the pressure on revenues and making Turnbull’s task of reining in a budget deficit forecast to reach A$35.1 billion ($25.2 billion) in the 2015-16 fiscal year more difficult.

A revolving-door leadership with six prime ministers in the past eight years has seen reform slip off the table, with then-prime minister John Howard coming close to losing the 1998 election due to his support for a GST. While a simpler system could prove popular, not all voters would win. Turnbull has signaled he’s considering reining in write-offs for older people withdrawing retirement funds, an increasing demographic as the nation ages.

‘On the Table’

The government will release a fresh paper, Turnbull said in an Australian Broadcasting Corp. radio interview this month. “Everything is on the table” with options to be presented to voters before the election, he said. They potentially include reducing the impact of “bracket creep,” where rising wages push workers into higher tax brackets without improving their living standards, and fewer tax breaks for investors in residential real estate.

The government is also looking to crack down on multinational companies involved in tax avoidance through profit shifting, Treasurer Scott Morrison said Oct. 7. Australia’s tax agency will enter talks with 80 companies that would be potentially affected by a tax avoidance bill circulating in parliament in a bid to persuade them to pay a greater share of taxes on profits generated in the country.

The new leadership means there’s at least a chance some tweaks will be made, said Walters at JPMorgan. “Prior to the change of prime minister there was a discussion paper in the works but major areas had already been ruled out,” he said. “Now with new leadership and hopefully better salesmanship, we’ll end up with a more cohesive agenda for reform.”

Turnbull’s relative popularity means he has some political capital “which he can spend on convincing Australians about the need for tax reform,” according to Andrew Hughes, a political analyst at the Australian National University. “It suits his political purposes because he needs to be seen to make some headway on the economy before the next election and if he does make real changes, it will boost his budget’s bottom line.”