Australia's Future Tax System

Final Report: Detailed Analysis

Chapter D: Taxing consumption

D1. A cash flow tax

D1–2 A CFT could be simpler for small business

By avoiding complex exemptions and special rules, a CFT could be radically simpler than existing consumption taxes, while also improving the efficiency of the tax system. Indeed, in a similar way to individuals being able to have personal income tax returns pre-filled and sent to them as a default (see Section G4 Client experience of the tax and transfer system), a single-rate, broad-based CFT provides the opportunity for many businesses to significantly reduce their compliance costs. A CFT could be reported through a simpler business activity statement using fewer labels than the statement used for the GST.

Relying on the natural systems of businesses, such as financial or payroll systems, can reduce compliance costs (see Section G4 Client experience of the tax and transfer system). With the CFT, companies or sole traders with very simple tax affairs might use a bank account to have their CFT liability calculated automatically (see Box D1–2).

Box D1–2: Automatic tax accounts

A simple business without export flows or complex financial transactions might choose to run all their business transactions through a single 'automatic tax account'. This service might be offered by their bank, which could automatically calculate net cash flows (excluding financial flows and payroll costs). Some banks might offer to report this liability electronically to the ATO, eliminating the need for the business to provide separate returns for the CFT.

This leaves more time for running a business, and less time to worry about tax. A similar idea was recently canvassed for tax reform in the United States (President's Advisory Panel on Federal Tax Reform 2005, pp. 126–128).