Australia's Future Tax System

Consultation Paper

Introduction

In August 2008, the Panel invited submissions to the Review, guided by four broad consultation questions.

Q1. What major challenges facing Australia need to be addressed through the tax-transfer system?

Q2. What features should the system have in order to respond to these challenges?

Q3. What are the problems with the current system?

Q4. What reforms do we need to address these problems?

The Panel welcomes the considerable response to its initial call for community views. The Panel has received around 500 formal submissions from a wide cross-section of the community and a further 260 pieces of correspondence. Formal submissions to the review are available on the review website (www.taxreview.treasury.gov.au).

In August 2008, the Australian Treasury released a background paper — Architecture of Australia's tax and transfer system (Architecture paper) — and the Department of Families, Housing, Community Services and Indigenous Affairs (FaHCSIA) released the Pension review background paper (Pension paper). Together with the public submissions, these papers provide an important part of the platform for the review.

In this paper, the Panel outlines the feedback to its consultation questions and provides information intended to help evaluate the views expressed. The Panel then asks a series of further questions intended to guide its forthcoming consultations and its thinking about the fundamental design features that Australia's future tax system might embody. These questions are deliberately open and are provided for general guidance only.

Section 1 discusses the key themes emerging from submissions within the context of the Panel's first two consultation questions. Sections 2 to 14 discuss more specific aspects of the tax-transfer system, presenting submission responses to the third and fourth of the Panel's questions.

The presentation of community views in this paper is intended to be a synthesis of the key messages that have emerged from the initial consultation process, rather than a listing of every issue raised. The issues the Panel has identified for further consultation are not exhaustive and are not intended to limit discussion.

The Panel has highlighted issues it considers to be central to the design of the tax-transfer system including:

  • the mix of taxes through which revenue is raised;
  • the fundamental structure of the tax, transfer and retirement income systems;
  • the way individuals interact with the tax-transfer system; and
  • the structure of taxation in our federation.

Scope of the review

Consistent with the 'root and branch' description of this review, the Panel's objective is to identify how the tax-transfer system should look at a structural level.

Consistent with its terms of reference, the Panel is taking a whole-of-system approach to examining the structure of the tax-transfer system. This approach encompasses the policy framework, the administrative structure and the policy and administrative processes that determine the structure and performance of the tax-transfer system.

In accordance with its terms of reference, the review will reflect the Government's policy not to increase the rate or broaden the base of the GST and to preserve the tax-free status of superannuation payments for the over 60s. The Panel notes the announcement in the 2008-09 Mid-Year Economic and Fiscal Outlook that Government consideration of the previously announced aspirational personal income tax goals has been deferred until overall economic conditions improve (Australian Government 2008c).

It is not practicable for the review to encompass every aspect of public policy and administration relating to the tax-transfer system. For example:

  • although several taxes are designed to meet industry policy objectives (for example, agricultural levies and customs tariffs) the Panel is not proposing to undertake a comprehensive review of the industry policies relating to those measures;
  • although taxes form a central part of fiscal policy, the Panel is not reviewing fiscal policy itself (such as appropriate goals for fiscal balances);
  • although taxes are implemented through laws, the Panel is not undertaking a review of the drafting of legislative instruments;
  • although issues of federal fiscal relations are an important part of the terms of reference, the Panel considers matters relating to the roles of different levels of government, the quantum of intergovernmental transfers and horizontal fiscal equalisation to be beyond its scope;
  • although a range of issues relating to tax policy formulation and administration are clearly and necessarily within the scope of the Review, the Panel does not anticipate undertaking a detailed and comprehensive review of all matters that relate to government policy and administration (for example, staffing and remuneration policies); and
  • although in-kind benefits such as health and education services, and child support obligations, are important in determining the support available to individuals and families, they are beyond the scope of this review.

A framework for reviewing Australia's tax-transfer system

A key starting point for the Panel is to understand the challenges, opportunities and other 'drivers' expected to bear upon the tax-transfer system over the next few decades and the design outcomes for the tax-transfer system that are likely to best position Australia to achieve society's aspirations. Drawing on both the terms of reference and views in submissions, the Panel has identified seven key issues. They are:

  • the type of society in which Australians might choose to live, including considerations about the role and size of government in Australia;
  • increasing globalisation and the changing pattern of world economic activity;
  • demographic change, including changing patterns of workforce participation;
  • climate change, the environment and sustainable economic growth;
  • intergovernmental relationships within the Australian federation;
  • the process of policy formation and its administration; and
  • the role of technological progress.

Any decision to change the tax-transfer system and how the changes could be made should be the outcome of a disciplined approach involving, where possible, evidence demonstrating the pros and cons of alternative tax-transfer design options and evaluation against a consistent set of principles. These principles are discussed in Section 1 and can be broadly categorised as equity, efficiency, simplicity, sustainability (including revenue adequacy), and policy consistency.

These principles may at times be in conflict. Inevitably, it will be necessary to make judgments about balancing different principles (where they conflict) and, in some cases, about the weight to be given to evidence where it is incomplete. The Panel recognises that not everyone will make the same judgments when faced with these conflicts and uncertainties. The Panel will strive to be open and explicit where judgments are made.

Bridging the gap between the current and desired tax-transfer structure will involve a transition path and, given the complexity of the existing system, transitional issues will require careful consideration. Decisions about the reform process will also need to take into account the balance between the short-term costs of change and the long-term benefits of reform, the distributional implications and revenue feasibility of reform, and potential macroeconomic implications.

The challenges, opportunities and principles outlined in Section 1, together with the considerations about the reform process, form a framework through which to identify desired outcomes and preferred transition paths.

A consultative process

Community participation is a vital part of a review of this scale. Based on the submissions already received, it is evident that many people support a comprehensive examination of the structure of the system from a long term perspective.

This paper will form the basis for the Panel's consultations with the community over the next 12 months. There will be many opportunities for people to participate in the review.

Any interested party can make a general submission to the review at any time up to Friday 1 May 2009. The Panel may also release more targeted discussion papers and call for submissions on specific topics during the remainder of the review period.

The Panel will host a series of public meetings in all capital cities and major regional centres from March 2009. We also plan to conduct bilateral and roundtable discussions with key industry and community groups between January and June 2009.

Recognising the significant social, environmental and economic challenges that Australia faces, and the need to consider international, theoretical and practitioner perspectives, the Panel will host a two day tax policy conference in June 2009. The conference will provide the opportunity for leading international experts, the academic and practitioner community, and industry and community organisations to share commissioned research, and discuss potential features of the tax-transfer system and their implications.

More detailed information on the consultation process will be posted to the review's website at www.taxreview.treasury.gov.au as it becomes available.

Improving the evidence base

While there is a large body of academic literature, both Australian and international, focused on tax policy issues, the scope of the review means that there are a number of issues where the available evidence is insufficient to allow the Panel to draw firm conclusions. To help remedy this situation and better inform debate, the Panel is commissioning a series of analytical papers to explore significant tax and transfer policy issues. It is envisaged that most of this work will be completed between March and June 2009. Some may be presented at the Review's tax and transfer policy conference scheduled for mid-2009. A list of the commissioned work and a brief summary of each item is at Appendix D.