Australia's Future Tax System

Architecture of Australia's tax and transfer system

8.1 Savings and investment choices facing individuals

The importance of investment and savings to our society reflects their role in enhancing the level of retirement incomes and future consumption of individuals, the productive capacity of the economy, and the returns to other factors of production, particularly labour.

Individuals and businesses tend to make savings and investment choices based on a number of factors including the tax treatment of the investment. Therefore, tax settings can have an impact on the choices people make, which ultimately determine investment in productive assets and individual sectors in the economy.

Australia has a rich asset base compared to the vast majority of countries in the world. These assets include:

  • our human wealth reflected in a highly skilled workforce (sometimes called human capital);
  • our political, institutional and legal settings that contribute to the development and maintenance of social capital;
  • our natural resource wealth including our extensive mineral resources as well as our native forests, our limited water supplies, our marine resources (including fisheries), the quality of our air, and our national parks; and
  • financial and non‑financial assets such as bank accounts, shares, factories and patents.

The focus of this section is on the latter two elements of our asset base, in part reflecting better information and tools of analysis.

How taxes affect saving and investment decisions

The level and form of tax affects incentives to save (and hence the level of saving), whether investments are made in Australia or overseas, the type of entity used to invest the savings, the financial structure for funding investments, and the allocation between different types of assets.

As noted in earlier sections, Australia collects more of its total tax take through taxes on capital, relative to other OECD countries (see Chart 6.5). The tax paid on the returns from saving and investment accounts for around a third of total government tax revenue. It is collected through a variety of taxes on income, land and resources, and capital transactions levied by the different levels of government. The impact of taxes on savings and investment in an open economy such as Australia's can usefully be described through the model in Chart 8.1.

Chart 8.1: Savings and investments in an open economy

Chart 8.1: Savings and investments in an open economy

Starting from the left‑hand side of Chart 8.1, individuals make an initial choice about how much to save. This is affected by several factors, ranging from holding some funds to pay for everyday needs or some 'lumpy' purchases such as a vehicle, through to decisions to save for a future family home or for retirement. Much of the analysis of savings and investment is based on an analysis of incentives between spending earnings now (consumption) and deferring that spending to some future point in time (saving). The impact of the tax‑transfer system on the incentives of individual Australians to save is discussed in Section 7.5.

Once decisions have been made on the level of savings, resident savers then choose whether to invest that saving in Australia or overseas (the two right‑facing arrows in the chart). Within Australia, the saver can choose to invest their savings directly in assets such as homes or rental properties, or through financial intermediaries such as banks, companies, superannuation funds or trusts (described as the 'holding entity' in Chart 8.1). In Australia, apart from housing, holding entities own most of the physical assets (such as machinery) and non‑physical assets (such as patents) that add to the country's productive capacity. Resident savers and holding entities also make decisions about how to finance the purchase of these assets, such as through borrowing funds or raising capital on the stock market (determining the financial structure of the asset acquisition).

Non‑residents, such as foreign corporations or pension funds, also make decisions about whether to invest in Australia or other countries. Australia's tax system can influence these decisions.