Chris Evans|Knowledge@ASB

Who would be the winners and losers if Australia simplified its tax system? As tax time looms, many Australians with relatively simple tax affairs are once again preparing to file a return in the hope of receiving at least a small sum back. And accountants and tax agents also are bracing for the annual onerous round of compliance activity on their behalf. But it doesn’t have to be like this! In the UK and New Zealand, the personal tax system has been simplified, so most “wage slaves” who are taxed at source no longer need to fill in a return. While taxpayers are spared the obligation for frequently negligible returns, accountants are able to focus on the more interesting activities of adding value and creating greater wealth for clients. In an interview with Julian Lorkin of Knowledge@Australian School of Business, Chris Evans, professor of taxation, outlines why the case for simplified tax adds up.

An edited transcript of the interview follows.

Knowledge@Australian School of Business: Many people loathe tax time, having to fill in a tax return every year and go along to an accountant. Is there an easier system?

Chris Evans: In many countries in the world you don’t fill in a tax return. Take the UK or New Zealand, for example, very few taxpayers in those countries have to fill in returns. It’s only taxpayers with more complicated tax affairs that have to complete and submit an annual return. Otherwise the tax system takes the right amount of tax at the right time during the year. At the end of the year, you neither owe money to the taxman, nor are you owed money.

In Australia, we could look at changing our system away from what we call comprehensive filing, in which everybody has to file a return, into one where there’s much more selective filing – only those with more complicated affairs need to submit a return. Those of us who are straightforward “wage slaves”, that is, people who have only employment income and have had the right amount of tax taken at the right time during the year would have nothing more to worry about.

Knowledge@Australian School of Business: I’ve been talking to Michael D’Ascenzo, the commissioner of the Australian Taxation Office, and he was saying that people enjoy filling in a tax return simply because they get money back as a result. They consider it almost like Christmas when they get the cheque in the post.

Chris Evans: That’s a rather strange way of looking at it. I don’t prepay my electricity so that I can enjoy getting money back at the end of the year. Why would I enjoy prepaying my tax, paying it before I need to and then getting a nice cheque back at the end of the year? It used to be a tradition in Australia that those cheques, the tax refunds, paid for the annual holiday, or the fridge, or something big. From the commissioner’s point of view, he’s obviously interested in getting everybody to submit a return because it’s sort of command and control and it means you know what’s going on. But the point is the tax office already knows most of that information anyway because the employers have sent in the amount of tax that they have deducted. If they wanted to, the tax office could find the information from the banks about the amount of interest that’s been paid to taxpayers, or from companies the amount of dividends that have been paid. So, a lot of the information is already there in the tax office. It seems very strange that they want us to then send in an annual return and confirm most of what they already know. It would be much simpler just to wash us out of the system.

Knowledge@Australian School of Business: Tax professionals argue that not only would thousands of them be out of work if we adopted the UK system, but also that people love finding ways of claiming back just a little bit of extra tax – and, effectively, that fun would go out of the system.

Chris Evans: That’s interesting because tax agents would be concerned about the loss of work. But we did this national survey with accountants about four years ago, and a lot of them said: “Yes, get this trivia out of our lives and let us get on with what we’re supposed to be doing, which is adding value to the businesses’ and to personal taxpayers’ wealth, rather than having to deal with everyone’s little refund each year.” The tax agents who do nothing else may well be losers and we would no longer have this same tax agent dependency that we have currently in Australia, but a lot of other tax agents and accountants would be able to get on with some serious value-adding work, rather than wasting time on petty compliance.

Knowledge@Australian School of Business: Can we assume that if we scrap the annual tax return, then the cost for individuals will go down? While people may not be claiming so much back, they would actually be paying less tax upfront?

Chris Evans: We’d be paying less to external advisors, and if we cleaned out and simplified the system we’d probably be paying less tax – so there could be a win-win all around.

Knowledge@Australian School of Business: I’m sure many people are crossing their fingers hoping that we will change the system

Professor Raja Junankar

Any plans to fast track US migrants for the construction and mining industries won’t help these industries find workers – because few people using a 457 work in mining, and most of them don’t come from the US anyway.

The Australian Government has announced it is going to fast track the assessment process for skilled workers. Under the agreement, US workers will able to complete a skills assessment before coming to Australia. The change will speed up the process of approving 457 visas. However I feel Chris Evans’ announcement about relaxing the rules for the 457 visa for US citizens seems to have missed the point – it appears an odd, short-sighted decision.

If there is really a shortage in workers due to the mining boom, then we should look at bringing in more plumbers and electricians, whereas the 457 visas mainly go to professionals.

Looking at the data on the ‘class 457’ visas, in 2011 72% of class 457 visas went to managers and professionals, and only 21% to trades and technicians. He says “The Australian states that received the vast majority of class 457 visa applicants was in New South Wales – which isn’t known as a big mining area. WA gained 23%, and Victoria 20%. Not Queensland, or the Northern Territory.

Also, look at how much they are earning. Wages for professionals are rising strongly, unlike those for non-professionals such as tradies: electricians, plumbers and the like. Certainly in the mining states such as Queensland, there is no increase in wages, compared with other states. This goes against what the miners are telling us – if there was a shortage, surely we would see wages go up.

The data for the 457 visas seems to go against what we are told they are for. The 3 main industries getting 457 visas are construction, health services and ‘other services’: nothing connected to mining. Also if we look at where people have come from that get a 457, the list in order is the UK, India, Ireland and then at 4^th, the USA. So we have to look at why the USA has been singled out to be fast-tracked, and the only conclusion I can come to is that it has nothing to do with demand, but is just down to being nice to the US. If the government really wanted to help mining companies they would help the UK, Ireland and India too.

We are told that fast tracked Americans will get mining jobs, doing the fly-in fly-out rotation, often from the US. But this seems a little odd – most of the jobs in mining are in very difficult conditions, and workers will not fly from the US to take them for a fortnight and then fly back. The USA market is also depressed, but not that many people will want to move over to take a job in a remote area. It just seems like the wrong move to make.

Professor Raja Junankar is a Professorial Visiting Fellow in Economics at the Australian School of Business.

Professor Robert Deutsch

If ever there was any doubt as to the status of Australia’s reputation as the lucky country all doubt appears to have been removed by the recent debate regarding a 1% company tax rate cut for the very narrow sector of small business which is fortunate enough to operate through the medium of a company.

The proposal for those who missed it, is that one of the carrots to compensate for the stick that is the Minerals Resource Rent Tax (the technical name for the mining tax) would be a reduction in the company tax rate from 30% to 29% for incorporated small businesses. The planned start date is 1 July 2012. Small business in this context as currently planned will be defined broadly as any business carried on through a company where the annual turnover is no more than $2 million. According to some estimates this will deliver tax cuts for 720,000 incorporated small businesses out of a total of small businesses conducted through sole tradership’s companies partnerships etc of 2.4 million. The cost to government revenue in the first year is expected to be in the order of $200 million which would in part be funded by a $1.4 billion revenue take from the proposed mining tax based on current estimates.

Let us for a moment look at it from the micro perspective of an incorporated small business rather than from the macro perspective of the government. A business with an annual turnover of $2 million (which is the current proposed upper threshold to qualify as a small business) might reasonably have taxable income of $1 million assuming deductible costs against turnover of $1 million. Tax currently would therefore amount to $300,000 which after the proposed corporate tax reduction would be reduced to $290,000.

Of course all this assumes that the incorporated small business in question is profitable. If it is not, it is unlikely to be paying any tax and accordingly a 1% tax reduction even for such an entity would be meaningless.

Even when looking at profitable incorporated small businesses, most would be lucky to have the numbers suggested in the previous paragraph. More likely the numbers would be half that suggested and thus give rise to net annual savings of only $5000.

Without wishing to belittle the savings that might be achieved, one would have thought that at a micro level they are so marginal as to make almost no difference to the ongoing viability and profitability of most incorporated small businesses.

At a macro level $200 million in costs is a very small hit to a government budget which runs into many many billions. In any event one would think that if the government is to expend some of the yet to be proven revenue from the mining tax, there are far better ways to utilise those funds for the benefit of small business. Perhaps an upfront grant of $5000 to any newly established small business (in whatever form) which employs at least 2 unrelated individuals would be of far more benefit to the individual enterprise and to the economy as a whole, than a miniscule tax cut to existing profitable incorporated small businesses. Based on those numbers this could aid in the establishment of 40,000 new small businesses.

How we can spend so much time and energy arguing about so little is quite remarkable. We are undoubtedly the lucky country if this 1% tax reduction for such a small group occupies our headlines so extensively.

Professor Robert Deutsch is from the School of Taxation and Business Law, Australian School of Business UNSW. This opinion piece first appeared in The Australian on 16 March 2012.

Tim Harcourt

The global economic outlook has deteriorated significantly, according to the Organisation for Economic Cooperation and Development (OECD), and that could have a significant impact on the Australian economy.

The OECD outlook shows how much of a drag Europe is putting on global growth. This is a reason for concern because the world economy needs Europe to grow or at least tread water. These forecasts are pretty dire, and it’s surprising how quickly this has gone from a drama to a crisis.

In its twice-yearly report on the global economic outlook, the OECD has lowered its growth forecasts for the world’s largest economies, and has warned that the euro-zone is headed toward a recession. It also warned that the debt crisis, now affecting countries previously seen as safe havens, could massively escalate economic disruption if not addressed, and create a new worldwide credit crunch, where countries become so worried about getting their money back, they refuse to lend to one another.

The central message is to keep calm. Australia has no reason for direct concern because our trading links are strongly tied to the Asia Pacific. The last three decades of economic reform here has enabled us to move from The Tyranny of Distance to the Power of Proximity. That is, away from the UK and Europe, and more towards our closer neighbours such as Asia and the emerging economies.

The OECD has urged the European Central Bank to act decisively to prevent the euro-zone sovereign debt crisis from deepening, which could drag the worldwide economy to the brink of recession, due to the size of the European economy, and its global reach.

China has strong trade ties to Europe, because China now exports more manufactured goods to Europe than to the USA. We in turn provide most of the raw materials for those exports, and so any impact on China could affect Australia. Even if there are no green shoots of recovery in the USA and Europe, in Australia we will still need bamboo shoots in China.

I do believe however we shouldn’t be too pessimistic. The OECD did say that Australia would maintain a healthy economic growth rate of 4 per cent in 2011 and down a bit to 3.5 per cent in 2012. So we should hopefully be immune from Eurosclerosis, but the world economy overall could do with some Eurovision.

Tim Harcourt is the first J.W. Nevile Fellow in economics at the Australian School of Business at the University of NSW and author of The Airport Economist www.theairporteconomist.com .

Centre for Innovation and Entrepreneurship | CIE Blog

My apologies on announcing the winners of last week’s Peter Farrell Cup. Official press release or announcement coming soon. In the meanwhile, I couldn’t help building on the earlier blog post about fear of failure vs failure to start. It was nagging me to create this bubble chart based on the same GEM data with a few changes:

• Fear of failure and entrepreneurial intentions in the same chart as different axes
• Bubble area according to additional population data (since the GEM data is based at the individual level, not firm level)
• Color coded by GEM’s classification (Factor-driven economy: RED, Efficiency-driven economy: BLUE, Innovation-driven economy: YELLOW)

So, if one were to draw a linear regression line through the whole data set, then Australia would probably be middle of the road for the overall data. If you look at only the yellow bubbles (innovation-driven economies), then Australia tends to be towards the upper right, i.e., greater intentions to start (not bad), but higher fear of failure (not good). Does that mean that relative to the other innovation-driven economies, Australia is a country of “intentrepreneurs” or “wantrepreneurs”?

– This blog post first appeared on the CIE Blog.

Tim Harcourt| The Airport Economist

In 1966, Geoffrey Blainey wrote his famous book “The Tyranny of Distance” on how Australia’s destiny had been shaped by its remoteness from the United Kingdom and Europe. Coincidentally, 1966 was the very same year that Japan overtook the UK as the number one naval destination for Australian shipping.

In the decades since then our integration with the Asia-Pacific region has increased exponentially. From exporting coal and iron ore – which we still do in huge quantities – Australian lawyers, architects and accounts have played a key role in the rapid development of India, western China and Indonesia.

Today, if Professor Blainey were to contemplate another book through the lens of the past four decades his title might be “The Power of Proximity” to describe Australia’s more recent good fortune in being part of the Asia-Pacific.

It is a momentum which has reached its most significant point with the announcement of the Trans-Pacific Partnership (TPP) comprising (so far) nine of the key economies of our region.

And with Greek debt and Roman ruins undermining the “old world” economy of Europe, the Asia-Pacific presents as the main hope for economic growth and Australia is indeed lucky to be an increasingly integrated part of the regional economy. But is luck we earned following the Hawke Government’s decision to open the Australian economy and the instincts of all sides of the Australian economic and political divide to continue to embrace the Asia Pacific region.

As the culmination of that momentum, the Trans-Pacific Partnership is probably the most significant economic announcement of the 21^st century so far in terms of Australia’s future.

Joining with the US and Japan along with Singapore, New Zealand, Malaysia, Brunei, Vietnam, Chile, Peru and even perhaps Canada and Mexico in a meaningful trade bloc is a major opportunity to streamline supply chains, regulations and rules of origin across the region, as well as to facilitate trade of green and digital goods.

It could also lead the way to an even larger trade grouping encompassing all of the countries of the Asia-Pacific Economic Forum, perhaps including – after the requisite diplomatic manoeuvrings – China.

It is Australia’s great fortune that we reformed our economy in the 1980s and 1990s just as the whole Asian region started to grow. That growth has gone beyond the traditional resources and manufacturing sectors and exploded into professional services and “stateless” services such as cloud computing, environmental technologies and other areas where Australia has developed competitive advantage.

Our $1.3 trillion superannuation industry is the envy of the world and our finance professionals occupy leading roles in regional financial institutions. Integrating our financial sector, in particular our funds management industry, with the Asia-Pacific is another major opportunity which can only benefit from the TPP initiative.

A key theme of the next decades will be the low carbon economy, and the APEC meeting took the step of cutting tariffs on environmental goods to five percent.

This is excellent news for the many innovative Australian cleantech companies whose prospects have already been boosted by the passage of the Government’s carbon pricing legislation. Lower tariffs can only benefit the push for Australian manufactured environmental goods to penetrate Asian markets. It will really put the green back into the green and gold.

Trade initiatives are important for workers as well as business. Exporters, on average, pay 60 percent higher wages and provide more job security than non-exporters.

APEC is often seen as little more than an annual Colourful Shirt Convention where world leaders gather and wear the national costume of the host country, but the TPP initiative is proof that APEC does matter, and is starting to deliver.

While the Doha Round of world trade talks ground to a halt and with it the whole World Trade Organisation process, the TPP announcement – and Japan’s support – give us concrete reasons for regional optimism.

In 1957, Japan helped Australia get into Asia by forging a commercial partnership with Australia, just 12 years after World War 11. With the TPP, Japan has supported what could be the most significant partnership to date in the 21^st century.

The exciting part is that it means so much more than commodities, agricultural products and old style manufactured goods. The TPP could give our transition to the low carbon, goods and services economy of the 21^st century some major momentum.

With the TPP in place Australia will really see the Power of Proximity in action and the Tyranny of Distance no longer holding fears for trade and commerce beyond our shores.

Tim Harcourt is the first J.W. Nevile Fellow in economics at the Australian School of Business at the University of NSW and author of The Airport Economist www.theairporteconomist.com

Centre for Innovation and Entrepreneurship (CIE) | CIE Blog

There have been recent critiques about What’s Killing Australian Innovation (see our commentary on a recent talk by ASB Dean Alec Cameron, and related ABC radio interview). At this week’s TiECon Australia, TiE Sydney chapter president Dilip Rao commented that Australia is ranked 18th globally for having a ‘fear of failure’ (first being worst). Based on the GEM Global Report 2010, Australia actually shows up worse, ranked 16th out of 59 countries.While that sounds quite bad, the spread of the scores shows that Australia is nonetheless close to the average, and not that much different to, say, Germany (see figure below). The classic benchmark is the US, which is ranked 47, and still not close to being statistically significantly away from average (assuming a normal distribution).

Fear of Failure: Percentage of 18–64 age group with positive perceived opportunities who indicate that fear of failure would prevent them from setting up a business

Wait a second, but what’s this other variable, called “Entrepreneurial Intention”? Well, it’s defined as the “percentage of 18–64 age group (individuals involved in any stage of entrepreneurial activity excluded) who intend to start a business within three years” (p. 63 in the 2010 GEM report). Australia ranks poorly on this one as well (39/59) if you take the rankings at face value. Interestingly, the US ranks even lower than Australia here (44/59).

What the heck is going on?

My best guess, is that in some countries, entrepreneurship is not a choice, but a way of life. Almost everyone there has to hustle and bustle to feed their family. Meanwhile in the “Innovation-Driven Economies” it’s an optional career choice. So, focusing on the latter, what do we see?

Well, Australia ranks 6/23 on the fear of failure measure, but still very close to average for the group (US ranks 20/23 in this group). Australia also ranks 7/23 on the entrepreneurial intention measure, again still very close to average for the group (US ranks 11 in this group, worse than Australia!).

=> Claims that Australia has a fear of failure are NOT supported by THIS data
Yours truly,
The Centre for Innovation & Entrepreneurship

This post first appeared on the CIE Blog.

Vic Edwards

China could be about to witness a sharp economic contraction. Although the World Bank has played down fears of a hard landing in China, the dynamics of Australia’s relations with China are undergoing a rapid process of change, and this will reshape international and foreign policy between our two countries.

China’s growth this year is below last year’s level as weakening external demand has hurt investment and exports. Very poor Chinese manufacturing data shows it is at a 32 month low. Alas, contagion from Europe is impacting China, and that is causing pressure on Australia.

China’s economy faces growing risks from Europe’s sovereign debt crisis and from debt held by local Chinese governments but it could engineer a soft landing by easing monetary policy, according to a report yesterday by the World Bank. It expects Chinese growth will slow to 8.4 per cent in 2012.

I feel other events will also cause problems for our relations with China. There will be some reappraisal of where China stands with Australia, following the new Trans-Pacific trade-bloc know as the Trans-Pacific Partnership that includes nine nations including Australia and the USA, but China was not given an invitation to be a member nation. We should be concerned that there is now some doubt in China as to how much Australia can be trusted and relied upon.

For some years now, China has been able to rely on Australia as being a good trading partner and friendly nation no matter whether Labor or the Coalition were in power. However in just the past week President Barack Obama’s strong admonishment of China’s currency policy, the decision by Prime Minister Julia Gillard to reverse Labor’s long standing policy of banning the sale of uranium to India, and the agreement to locate a powerful 2,500-strong American marine task force near Darwin area all reshaping international and foreign policy between Australia and China. This is particularly so because China was not consulted on several of these, and Australia has been closely associated with all events. In China’s eyes, it doesn’t look good.

The World Bank has forecast that inflation will fall further, down from the 37 month high of 6.5 per cent in July, as its economy slows.

Will China react poorly to Australia by not buying iron ore, natural gas, bauxite from us?

I think not. However, it may cause them to re-evaluate their long term trading partnerships and future investments and they will most likely diversify their sources of supply – for example more iron ore from Brazil and Mozambique and less from Australia. They may also invest in developing the plant and equipment necessary to make high grade steel in these countries. However, the measures taken in the last week have also brought Australia closer to India and this may be seen as a good longer term play as India is tipped to overtake China as a production power engine in about the year 2030.

Vic Edwards is a Visiting Fellow in Banking and Finance at the Australian School of Business

Nina Mistilis

Qantas is facing a further drawn-out battle with the unions, and that may cause yet more long-lasting damage to its brand. The Qantas dispute is settling in for the long haul, now that it has been taken into binding arbitration – a move that could take months to resolve.

This confrontation with the unions has been building for years and seem and has now culminated in arbitration. All of this has taken place in full view of the travelling public. Qantas – in going to arbitration – has won what it was seeking – which is a stay on industrial action – but in the long term it seems to have lost the war.

I believe it has alienated passengers, the industry and the government, and that’s not a good position to be in. The Qantas brand is tarnished.

Negotiations between the airline and the Transport Workers Union, the Australian and International Pilots Association and the Australian Licensed Aircraft Engineers’ Association collapsed just before a deadline set by Fair Work Australia (FWA).

I believe the longer this dispute rumbles on, the more the Qantas brand image will be badly impacted.

That’s a global perception, because passengers all over the world who want to get to Australia for a holiday, or back home for work, are wondering if it is safe to book a Qantas plane, or whether it will be cancelled again. Many are saying they will never trust Qantas again, particularly in business class, because business wants reliability above everything else. Certainly, in the immediate future, the brand is tainted and they’re really behind the eight ball.

I don’t see how they’re going to catch up easily. Even if the arbitration settles on the side of Qantas, it may still hurt Qantas in the medium to long term, although I think it’s really hard to say what the long term damage will be. It partly depends on how events unfold. If it is solved quickly, which seems very unlikely, then the brand will be restored. But if it continues, and if there’s a perception – as the unions are saying – that service will drop due to the “asianisation” of the airline, then the brand will be completely damaged. Will that mean that less passengers book on Qantas? I don’t know the answer to that. Time will tell.

Qantas chief executive Alan Joyce yesterday said while his preferred option had been to resolve the dispute through negotiation, it was now time to let FWA bring the matter to a close.

But it is reliability is an important factor in terms of the branding of an airline. When it comes to the crunch, we need to get to the destination on a certain date and we cannot afford to be stranded at home, or somewhere in Australia, or abroad. So when it comes to the choice, will we choose Qantas or will we choose another airline?

Nina Mistilis is a senior lecturer in Tourism at the Australian School of Business.

Larry Dwyer

What is the future for tourism in Australia?

Aussies travelling and taking their holidays at home seem to be a “dying breed”, thanks to the high dollar, with most Australian residents having a taste for international travel only cataclysmic world events could change.

I feel Australia should place more emphasis on its urban tourism attractions, rather than the outback. Its cosmopolitan cities, its attractive streetscapes, its fine dining, sophistication and the sheer liveability of its cities are second to none. There are many fine urban tourism precincts that rival any around the world. And remember that Melbourne has vaulted Vancouver to become the best city in the world to live, according to the latest Economist Intelligence Unit’s Global Liveability Survey, with Sydney not far behind.

Domestic tourism products struggling the most are large-scale resorts in remote or outback destinations which are harder and more expensive to reach, and which simply can’t compete for value for money with overseas destinations.

I’ve also seen that consumer values are changing in ways that favour urban tourism, including strong Generation Y attributes such as being money rich and time poor, plus seeking hedonistic, discerning experiences. They are less loyal to brands – something the airlines know well now – and they seek value for money, not necessarily low prices, within authentic tourism experiences.

Australia should give up trying to compete at the mass-market level to attract tourists. A move to putting emphasis onto Australia’s urban areas has a good synergy with meetings, conferences, and events. Business tourism would be an important market in this context. However there is a place for the outback, and tours to more remote areas could piggyback on this.

One of the world’s fastest growing tourism markets is that of business events tourism. It is typically one of the highest yielding inbound tourism segments because of the high per-delegate spend. Worldwide, there is competition among destinations for such business and, with substantial government support for marketing activity and infrastructure development, this trend is expected to continue.

There are substantial opportunities for operators to associate themselves with business event tourism by way of accommodation, catering, tour operations, and organising professional conferences. Herein could be the future of Australian tourism, with business tourism capable of providing increased opportunities for the Australian tourism industry with strong appeal across all key markets.

Larry Dwyer is a Professor in the School of Marketing at the Australian School of Business.