Tax Reform

I spoke in parliament yesterday about tax reform.
Tax Laws Amendment (2011 Measures No. 5) Bill 2011
20 June 2011


The great achievement of the Labor government has been a serious ongoing commitment to tax reform. It is with taxes that we build society and a hallmark of this Labor government has been focused and consistent attention on tax reform. We, of course, commissioned the Henry review, a root and branch tax review, which has for the first time in a generation looked across the tax system at how to make it work more effectively. As the Henry review in its opening noted:

'A 21st century tax and transfer system should meet its purposes efficiently, equitably, transparently and effectively. Critically, it would support per capita income growth rates at the upper end of developed country experience by encouraging high workforce participation, a more efficient pattern of saving, and stronger investment in education and physical capital.'

The Henry review noted that revenue raising should be concentrated on four robust and efficient tax bases: personal income; business income; private consumption through broad, simple taxes; and economic rents from natural resources and land.

The Henry review has underpinned much of what the government has done on tax reform. Commentators, I think, have missed one of the big stories about the recent budget, which is that it contains substantial tax reform, not the sort of tax measures that we saw all too frequently during mining boom mark-1—recycling revenue into badly targeted measures—but measures that focus on how to make our system more efficient and more equitable, and operate on a simpler basis. It is for that reason that this government is going about putting in place a minerals resource rent tax, a tax that will ensure that Australia's big mining companies at last pay their fair share, a tax that sits very much in the tradition of the progressive side of politics of ensuring that taxes are paid by those who can best afford them and that taxes impose a minimum deadweight cost on the economy. Growth is a Labor value. Increasing the size of the Australian economy is absolutely critical and the minerals resource rent tax will see us do that. Another substantial tax reform is carbon pricing. We are recognising, through a fixed carbon price and then an emissions trading scheme, that the best way of dealing with dangerous climate change is to go to the heart of the problem, which is dangerous carbon pollution. At the moment, polluters can put as much carbon pollution into the atmosphere as they like. They do not pay for carbon pollution. Carbon pricing has been presented as an environmental reform but it is of course also an economic reform. The most effective way of getting carbon abatement in the Australian economy is to put a price on carbon, not through the coalition's grab bag of subsidies for polluters but going straight to the issue, putting a price on pollution and bringing about a smooth transition to a cleaner, greener economy, taking Australia from its current position as the most carbon intensive country in the developed world to a position where we are able to compete effectively for the green jobs of the future.

The Gillard government is also putting in place substantial reform on fossil fuels through legislation which is finally enacting reforms originally foreshadowed by then Treasurer Peter Costello in the 2003 budget. What is tragic about these fuel reforms is that the coalition, at the last moment, have walked away. For the best part of the last eight years they have been in the cart on this fundamental economic reform but at the last moment saw a populist slogan and leapt out of the cart. I am glad to see the Assistant Treasurer here in the chamber. I am sure he would be as pleased as I am at the passage of those reforms through this House in the most recent session.

When crisis has hit, Labor has also used taxation reform exactly as economists would have us do. We put in place a modest flood levy to deal with the rebuilding cost required from the natural disasters of the most recent summer. Looking back further to the economic downturn, we used a fiscal stimulus that was timely, targeted and temporary, recognising that household payments and infrastructure investments were the most efficient way of getting the economy going again. On each of the tax reforms I have listed, Labor listened to the economic mainstream. While the coalition were listening to who knows what zealots, we were there focused on the economic mainstream and on delivering real reforms.

And it is those real reforms that lie at the heart of Tax Laws Amendment (2011 Measures No. 5) Bill—reforms recognising the importance of phasing out outdated payments. One of the key reforms in this legislation is removal of the dependent spouse tax offset. The dependent spouse tax offset existed at a state level prior to the 1930s but was first introduced at a federal level in 1936. During the second reading debate, one member justified the measure saying he felt it was the duty of a husband to maintain his wife and therefore it was right and proper that a husband would receive a deduction for it. I do not think that such a sentiment would be shared by most 30-somethings in the labour force today. Most families without children would not think feel it is the duty of a husband to maintain his wife and in an era in which we are trying to boost labour force participation, in which we hear much talk of skills shortages, it is important that we remove disincentives to work.

As the dependent spouse tax offset phases out, it imposes an effective tax rate in the phase-out range. If a dependent spouse earns more than $282, under the current program the entitlement reduces by $1 for every $4 the dependent spouse's income is above the threshold. The effect of this is to put in place another 25 per cent tax rate in addition to the current marginal tax rates for the first $10,000 earned by a so-called dependent spouse.

We are steadily phasing out this measure. It will be phased out for taxpayers born after 1971, recognising that some of those who have been recipients of this payment may now be in a position where it is not straightforward for them to enter the workforce. Taxpayers who are invalids, permanently unable to work or are carers will not lose this benefit. The phase-out is applying to able-bodied taxpayers, those aged under 40 and those who—certainly from the discussions I have had with my electors—would not have the social norms that were expressed in this place when the dependent spouse tax offset was put in place. This measure modernises the Australian tax system. It brings the Australian tax system up to speed with contemporary values and it boosts labour force participation—an absolutely critical measure.

We are also making the Australian tax system simpler and fairer for business and the community. It has long been recognised that the entrepreneurs tax offset is poorly targeted for small businesses. There is little evidence it has acted to encourage the establishment of small businesses. More than 80 per cent of small businesses were eligible for the offset. Rather than allowing a small business to grow, the entrepreneurs tax offset encourages businesses to structure affairs in a particular way, despite the market opportunities that might be present.

The assistance is provided at a fairly low level to very small businesses. The maximum claim is $2,500, but the average entrepreneurs tax offset claim was less than $500, with 70 per cent of claims being below $600—a fair bit of paper work for a relatively small sum of money. The entrepreneurs tax offset is difficult to administer and adds to the complexity of our current tax system. There are better ways and more effective ways to help small businesses. The $5,000 immediate deduction, which will come into place from 2012-13, is a far more efficient and effective way of helping our small businesses grow and so boosting employment in this critical sector.

The budget also puts in place important reforms to fix the current system of fringe benefits taxation for cars. This is a system which is both inequitable and inefficient. The existing statutory formula method for determining the taxable value of car fringe benefits delivers a greater tax concession the further the car is driven. Car fringe benefits arise when an employee uses salary sacrifice for an employer provided car for private use. Under the statutory formula method, the person's car fringe benefits are determined by multiplying the relevant statutory rate by the cost of the car. The current statutory rates are designed so that a person's car fringe benefit decreases as the distance travelled by their vehicle increases. People can therefore increase their tax concession by driving their vehicle further. The Henry tax review reported evidence showing that this is exactly what people do.

Anecdotally, in my electorate one hears stories that, as the end of the tax year approaches and as a taxpayer feels that they are not necessarily going to be in the most favourable mileage bracket, they will lend the keys of their car to a teenage son to drive to the coast for the weekend. Their child might otherwise have caught a bus to the coast. These sorts of environmentally unsound practices are effectively encouraged by a poorly structured tax concession. So we are reforming the statutory formula method, replacing the current statutory tax rates with a single rate of 20 per cent that applies regardless of the distance travelled. The reform will only apply to new vehicle contracts entered into after the announcement on budget night so, of course, it will not affect people who have already entered into contracts. That shift to the single standard 20 per cent rate will be phased in over four years. Naturally, people who still use their vehicle for a significant amount of work related travel will be able to use the operating cost or log book method to ensure that their car fringe benefit excludes any business use of their vehicle. Over the forward estimates this measure will result in an increase in revenue of nearly a billion dollars, and this is additional revenue which is then available for more efficient and more equitable tax reforms.

I am very proud to be part of a Labor government which is committed to good economic management and important tax reforms, tax reforms that I hope will outlive many of us in this place, tax reforms that reflect the understanding of those of us on this side of the House that it is important to draw on the best evidence available and tax reforms that recognise that the Henry review has laid down much that we can draw on in the future. I commend the bill to the House.

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8/1 Torrens Street, Braddon ACT 2612 | 02 6247 4396 | Andrew.Leigh.MP@aph.gov.au