Architecture of Australia's tax and transfer system
Chart 2.1 provides a schematic representation of Australia's tax‑transfer system, illustrating the way in which it impacts on individuals' economic behaviour. It also depicts the elements of the tax‑transfer system that are relevant to the operations of Australian businesses. This is indicated by the light blue background shading to the tax elements of the chart. The chart is not intended to be a comprehensive representation of the tax‑transfer system. Instead it summarises the major elements of the system and the key linkages between them.
At the core of the system are Australians who make choices about: investing in education; engaging in paid or unpaid work (such as family care responsibilities and home services); how much to spend and on what goods and services; and how much to save and to allocate to alternative investments. These choices are interdependent. The tax‑transfer system can impact on these choices through one or more channels. For example, decisions about how much to work are influenced by the availability of income support, the rate of withdrawal of that support as income is earned, the potential loss of other concessions, the rate of tax on earned income and, if child care is required, the net cost to the individual of that care after allowing for government subsidies.
In Australia's federal system of government, taxes and transfers are administered by several levels of government. The separate Australian, state and local government systems are interlinked and can be thought of as one tax‑transfer system with multiple components. Individuals tend to interact with the Australian government tax‑transfer system, and the tax systems of the State and locality in which they reside. In contrast, businesses that operate across several States, or nationally, interact with multiple state tax systems and many local governments, in addition to the Australian government system.
The Australian government's role in the tax‑transfer system is considerably larger than that of the States. While there is some overlap between their roles, the types of taxes and transfers administered by the Australian government and the States differ. This is in contrast to some other federations, such as Canada, where the federal government and the provinces and territories have the same or similar taxes and transfers.
On the Australian government side, individuals interact directly with four elements of the tax‑transfer system: personal income tax; superannuation; taxes on goods and services; and transfers (including cash payments and non‑tax concessions). Through the personal income tax system, individuals also interact with company tax.
On the state side, individuals interact with a more restricted transfer system and a range of indirect and property taxes. They may also be indirectly affected by payroll tax via their employer, if liable to pay the tax.
Many Australians also interact with governments via government‑provided services such as health and education. These services fall outside the scope of the review.
The tax‑transfer system not only impacts on individuals but also on business. It is business that remits much of the personal income tax to the ATO through pay as you go (PAYG) withholding. Businesses may be required to pay fringe benefits tax (FBT) and make superannuation guarantee payments on behalf of their employees. Businesses also interact with the tax‑transfer system in their own right — for example, through the company income tax system, the payment of payroll tax, GST, excise, various taxes on land, and a range of other taxes levied on business inputs. These interactions are represented in Chart 2.1 by the light blue background shading. Businesses operating in more than one State, or nationally, interact with multiple Australian and state government tax systems.
Some individuals and businesses conduct economic activity outside the tax‑transfer system in the 'underground economy'. The size of the underground economy is difficult to determine but is considered by the ABS to be between 1 and 2 per cent of GDP (Box 2.1).
Chart 2.1: Schema of the tax‑transfer system
Box 2.1: The size of the underground economy
The underground economy consists of legitimate economic activity that is not reported to government agencies. By its nature, the underground economy cannot be measured directly. Estimates of its size must rely on indirect approaches, some of which are methodologically contentious.
The ABS makes adjustments to its estimates of the income side of GDP based on information from aggregated income tax audits. The adjustments for 2000‑01 added 1.3 per cent to the unadjusted level of GDP.
In 2003, the ABS (2003) attempted to identify the highest possible values for activity in the underground economy through a highly disaggregated analysis of the components of the income side of the GDP account. This work suggested that the largest possible adjustment to the income side of GDP to account for the underground economy would be around 5 per cent.
Breusch (2005) estimated that the cash economy probably accounts for between 1 and 2 per cent of observed GDP.
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