Is the Australian Tax System broke?

By Steve Marsten

We have just received the Parliamentary Budget Office (PBO) report into Australia’s future tax base and it paints a picture of declining revenues and increasing demands on the public purse.

The problem is we are an ageing population and trends such as more fuel-efficient vehicles, the decline of smoking and the popularity of wine over beer are all eroding collections from consumption-based taxes that businesses collect on behalf of the Tax Office.

The report shows that income tax from workers has increased from 8.6 per cent of GDP in 1971-1972 to 12.6 per cent by 2015-2016, while the contribution from taxes on consumption (the GST and various excise duties) has only moved from 5.3 per cent to 5.7 per cent over the same period.

Company taxes have declined as a percentage of GDP from 3.3 per cent to 3.2 per cent. This is mainly due to a falling profitability levels.

The report shows that Australia’s future tax revenues cannot be sustained by an ever-decreasing workforce. It’s predicted by 2045, there will only be 2 workers for every 5 retirees.

The point is - that as people age and retire they not only stop paying income tax but increasingly direct their spending to categories which do not attract GST, such as health and medicines. At the age of 65, a large percentage of the demographic are entitled to a tax-free age pension.

The problem with the GST system in Australia is that since the introduction of GST Australian households have spent progressively more of their income on products that are exempt from the GST. It’s always been a flaw in our system compared to New Zealand’s version.

The Australian problem is not about whether we reduce company tax rates to make our companies globally competitive and hence keep jobs in Australia, its whether we have the political will to realise we have a problem and the best means is to address it is the consumption tax.

Both political parties know this has to happen at some stage. They would just prefer the other side deal with it first. We don’t have a Howard or a Keating on the political radar to make these hard decisions. Our leaders of today need grow some together and address this issue for the good of Australia.

For more information contact the team at UHY Haines Norton Gladstone on 4972 1300.