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 John Piggott | CEPAR

Australia is lauded throughout the world for its retirement income structure. Although it is largely unappreciated at home, we are in an enviable position when compared to the implicit pension debt being racked up among our OECD counterparts. As a paradigm, it has everything going for it – income protection for the less well-off, cost containment, and mandatory minimal levels of mandatory self provision for those who can afford it.

But successive governments put the whole structure at risk by tinkering with super taxes.  No country has borne more capricious changes to the taxation of its private pensions than Australia.

It’s worth taking a step back from the current controversy to reflect on three questions. First, what should a pension tax system look like? Second, why should Australia’s pension tax system be subject to so many more changes than its counterparts elsewhere? And finally, why does it matter if Canberra fiddles?

Almost all countries offer tax concessions for pension saving. The implicit deal is, preserve your savings until you retire, and get a tax break.  The most common break is exempting the investment earnings of the pension fund. Then either contributions are deductible under the personal income tax, or benefits are tax-free.

On the whole, taxing benefits is the better way to go. This avoids complexities around employer deductions for pension contributions, and bad investment outcomes are cushioned through lower taxes, while investment outcomes above the norm pay some extra tax. The government shares the risk. The timing of tax collections is better too – tax revenues will increase when an expanding older population cohort is driving public expenditure up.

But whether contributions or benefits are taxed, as long as investment earnings are exempted, economic efficiency is well served. You have a system that closely aligns the tax treatment of super with the tax treatment meted out to the other major life-cycle asset – owner-occupied housing. This is a critically important aspect of the policy design.  In their roles as retirement saving vehicles, these two retirement assets should be treated similarly under the tax system. And by exempting earnings, the price distortion between consumption during working life and consumption during retirement is largely eliminated.

Australia’s super tax departs from both these standard paradigms. Instead, it separates superannuation taxes from personal income tax altogether. Contributions are income tax exempt, but taxable at a flat rate in the pension fund; earnings on those contributions are also taxed. And benefits used to be taxed as well, until the 2007 Better Super reforms exempted benefits paid to those over 60. The result is that there is no link with the progressivity inherent in the personal income tax.

Separating superannuation taxes from the personal income tax makes tinkering with pension taxes tempting for governments. Changes can be made without their showing up in a pay packet the next week.

This has happened several times since the Superannuation Guarantee was introduced, and it looks like it’s about to happen again. What is proposed may be a small step in the direction taken by the Henry Review on this issue, which accepted contributions taxes were here to stay, but recommended that the rebate be linked to the personal rate schedule. It also recommended a reduced earnings tax to help the power of compound interest generate more accumulations.

If that’s the direction of change, then it would be better to take the proposal in its entirety, rather than just apply it to the top 1%, as news reports suggest is likely. And this should be well thought out, converging to something stable, with discussion and consultation, not a last minute cash grab.

Not that the top 1% is taxed especially harshly in Australia. A somewhat higher marginal tax rate for the top 1%, say 49% above $250,000, maybe on a temporary basis, would be a better response.

So, why does the tinkering matter? Two important reasons. First, this is a whole-of-life issue, and long-term planning is part of it. Although some rules are bound to change with time, surprises are bad and should be avoided whenever possible. Once you get to a point where arbitrary policy surprises are expected, credibility in the system evaporates. The top 1% today, the top 5% tomorrow, who knows the day after?

People will likely reduce their non-mandatory contributions, saving will fall, eventual reliance on the age pension will be higher than it would otherwise have been, and most importantly, many people will have a less satisfying retirement.

Second, change increases administrative costs and charges. More records have to be kept, checked, and transferred when the worker changes funds. Australia’s pension costs are already on the high side. Through a full career, increasing charges by just a half percentage point can reduce the eventual accumulation by more than 10%. That impacts on everyone’s super outcomes, not just the top 1%.

Professor John Piggott is director of the ARC Centre of Excellence in Population Ageing Research at the University of NSW.

This article first appeared in the Australian Financial Review 30 April 2012.

Rosemary Howard

Childcare for many families is the second biggest expense after the mortgage. If laptops, cars and mobile phones are all tax-deductable, why isn’t childcare?

In a recent Knowledge@Australian School of Business article, leading business women and academics have flagged childcare as the single biggest and most directly related cost to earning income that should be eligible for a tax rebate.

That’s why it makes economic sense for it to be firmly on the agenda for next week’s Tax Summit in Canberra.  To fulfill the required rise in national productivity and global competiveness, we must address this issue head-on.

The prohibitive cost of childcare affects all families. The lack of financial support in the form of childcare incentives is a serious impediment to women’s participation in the workforce. It is at odds with the nation’s shared objectives when it comes to advancing women into leadership roles, including those at the executive and board level.

Women’s poor representation at the top of the business ladder has been a topic of robust discussion. The latest statistics show that of ASX 200 appointments, woman make up 51 per cent of professionals but only fulfill 2.5 per cent of chair people, 11 per cent of board appointments and 3 percent of chief executive roles.

The 2010 Global Gender Gap Report, a publication of the World Economic Forum, found Australia ranked as No. 1 in terms of educational attainment but No. 44 for labour-force participation of women. This shows that Australia has one of the most highly educated female populations in the world, yet we do not allow women to fully participate in the workforce. The current gender bias means that women are not being employed in roles where they can be most productive.

Substantial childcare incentives could not only help lessen the gender gap, but drive productivity levels. This is supported by the Productivity Commission’s July 2011 research which shows that a 1 per increase in early childhood education and care fees leads to a 0.3 per reduction in the employment rate of mothers with young children and a 0.7 per decline in hours worked.

According to a 2009 Goldman Sachs report, Australia’s Hidden Resource: The Economic Case for Increasing Female Participation, having more women in leadership roles has the potential to boost the level of economic activity in Australia by 20 per cent.

Unless the government is prepared to increase taxpayer subsidies for childcare, the increasing cost of childcare will continue to limit women’s participation in the workforce; ultimately inhibiting their career advancement.

Rosemary Howard is Executive Director and Conjoint Professor of AGSM Executive Programs at Australian School of Business, UNSW.