Top tax rate of 49.5pc will entrench evasion: experts

Jacking up the top income tax rate to levels last seen in the late 1980s – just as company taxes are cut – will create a perfect storm for high income earners to engage in tax avoidance, including through increased use of property negative gearing.

Policy experts are ringing alarm bells over Labor’s plans to effectively entrench a top marginal tax rate of 49.5 per cent, widening the already large difference between income taxes and company taxes.

Labor is pushing the government to retain the temporary 2 per cent deficit repair levy introduced in the 2014 budget, making permanent the first increase in the top tax rate since the end of World War II, and undermining Australia’s attractiveness as a destination for high-skilled migrants.

The marginal tax rate for a worker earning $200,000 in the US or New Zealand, for instance, would be 33 per cent, and only 17 per cent in Singapore.

Greg Travers, tax director at William Buck Chartered Accountants and Advisors ,cautions Australia is doubling down on the two drivers of tax avoidance: a high rate compared to other countries, and “tax arbitrage”.

“This means some high income earners – not all – will seek to avoid paying tax at 49.5 per cent,” he said.

“Retaining the debt levy will increase the incentive to try and tax plan, which can evolve into tax avoidance, and will only increase the problem. The irony is this will make negative gearing even more attractive.”

Redress imbalances

A large difference between income and company taxes creates a “significant bias” towards trapping profits at the corporate rate, even when those funds are used personally by shareholders, said BDO tax partner Mark Molesworth.

“Taking the two rates further apart will … only exacerbate the problem.”

Mr Molesworth warns that the current tax system is so heavily weighted towards income taxes that it will take a long time to redress the imbalances. “If the process is never started, it will never be realised.”

Terry Hayes, senior tax analyst, Thomson Reuters, notes that the trend of the past few decades to narrow the gap between the top personal rate and company taxes seems to be sliding into reverse.

“The gap is set to grow to 20 percentage points or more,” he said.

“[This] can become fertile ground for tax planning. At a general level, the higher the personal rate, the more ‘incentive’ there is for people to try to find ways to lower their tax burden.”

The threat of increased tax avoidance will impose a major burden on tax authorities, said Mr Travers.

“Countering tax avoidance activities means greater complexity in the tax laws as new and more detailed ‘anti-avoidance’ rules are introduced.

“It also means that the ATO needs to put more resources towards identifying, reviewing and challenging tax avoidance activities.

“This will lead to greater costs for everyone, either in compliance costs for taxpayers or administration costs for the government.”