Australia is saddled with an overcomplex system that punishes families, former ATO lieutenant says.
A former ATO second commissioner has fired a broadside at politicians for their “dumb” attempts at tax reform characterised by “thought bubbles” that favour one group over another and fail to learn lessons from the past.
“Fiddling” and “tweaking” politicians had avoided opportunities to fix the system, said Andrew Mills, delivering an opening address at this week’s Tax Institute Tax Summit, and a failure to consult had left Australia “saddled with some of the most difficult tax rules to comply with and to administer”.
Politicians damned for ‘dumb’ attempts at tax reform
You might never have to file a tax return again
Taxpayers and business owners would be spared the task of filing lengthy tax returns every year if the Tax Office moved to a system of automatic data exchange under a bold proposal which could end the annual lodgement scramble.
In what would be a landmark overhaul of Australia’s taxation system, former Tax Office second commissioner Andrew Mills says real-time or regular information flow from banks, employers and service providers could replace the antiquated notion of “lodgment” and bring the country’s filing system into the online era.
But he conceded the appetite for tax reform inside parliament is limited, saying politicians appear “inept” at making the case for difficult change.
An automated system would be a major shift for the economy: the ATO receives more than 14.2 million individual income tax returns every year and pays out about 11 million refunds.
Former senior ATO official Andrew Mills proposed the change in a speech to the Tax Institute. Wayne Taylor
“Annual tax returns and annual reporting is the foundation on which our system was built, but it is not only somewhat anachronistic it is also honoured in the breach,” he told a summit organised by The Tax Institute on Wednesday.
“Yet, nearly all tax systems are based on the concept of measuring profit or income on a year by year basis and reporting and compliance follow. It was for convenience sake and does not have to be the paradigm in which we operate if we choose not to.”
Mr Mills said the ATO already collected information from taxpayers on weekly, monthly, quarterly and annual reporting deadlines, including through the single-touch payroll system used for employee wages.
He told the conference in Sydney wider use of automatic systems could give the ATO sufficient confidence that taxpayers were meeting their obligations, taking into account deductions and other information.
The change could lead to real-time payments and shift responsibility for management of tax liabilities from taxpayers to the ATO’s sophisticated internal systems.
Mr Mills said there would be lower risk of penalty for taxpayers and a greater confidence in the finality of tax affairs.
During tax time 2020, the ATO interacted with 39,000 public and multinational businesses and their 91,000 entities, about 4.3 million small businesses and 201,000 privately owned and wealthy groups.
It collected gross tax of $580.1 billion and provided refunds of $128.7 billion.
Mr Mills, who was the ATO second commissioner from 2014-2019 and is the chairman of the Financial Reporting Council, said changing Australia’s tax mix was critical.
“The divergence between common sense and our tax law is at the moment probably the greatest that it has ever been since Federation,” he said.
Decrying the lack of political appetite for serious changes to the system, he said Australia needed future treasurers in the league of Paul Keating and Peter Costello.
“Politicians have ceased to perceive the benefit of tax reform or are now incapable of turning that interest to advantage. In fact, they run from the very words “tax reform” like a cheetah.
“It saddens me that politicians from our major parties seem inept at mounting a decent argument for addressing what is so blatant a problem,” he said.
“At best we see politicians fiddling around the edges and not recognising that real reform means reform of the system – all of it – not just some part.”
The ATO’s Second Commissioner Jeremy Hirschhorn will address the conference on Thursday.
Commissioner Chris Jordan said last month the ATO wanted “seamless, integrated, and automated systems” in place to enable effortless flow of data by 2030.
He said reporting, payment and real-time compliance checks should coincide with taxable events.
Earlier this month former competition watchdog chairman Rod Sims said the country was ready for higher taxes to pay for essential services, calling for a new carbon tax, rules to stop multinationals limiting their tax bills and for a new minerals resource rent tax.
Scott Treatt and Andrew Mills: Former ATO SESs now of The Tax Institute fame
It’s time politicians found the courage to argue for more tax
Whenever stories bubble up about the disastrous human consequences of the United States’ lack of universal healthcare – people dying because they can’t afford live-saving drugs, or pregnancies that cost $30,000 – Australians love taking the high moral ground. We’re adamant that our commitment to a publicly funded safety net, in areas like health, education and social services, is baked into our national psyche. Unlike those freedom-loving, low-taxing, hyper-capitalist Americans we look after our own, we claim.
So, it would probably shock many Australians to know that when it comes to measuring a government’s capacity to fund public services Australia is actually far closer to the US than countries like New Zealand, Canada, the United Kingdom, Germany and France. Our tax-to-GDP ratio, which measures public revenue against the total size of the economy, is 27.7 per cent – well below the OECD average of 33.5 per cent. The US sits at 25.5 per cent, while New Zealand and the UK are above 32 per cent.
What do these numbers mean? It’s pretty simple: the more money the government raises, the more it has to spend on things like hospitals, primary healthcare, disability support, aged care, schools, income support and the pension. The smaller our tax take, the fewer resources we can redistribute to these social services. The crises in our aged care sector, across our hospital system and throughout our schools aren’t coincidences. They’re the inevitable result of a system that lacks the resources to deliver the level of service we need and expect.
The debate over the already legislated stage three tax cuts, taking place in the leadup to next week’s federal budget, has jumpstarted discussion about Australia’s revenue problem. At a cost of $243 billion over the next decade, the tax cuts will further erode government revenue, diminishing the amount of money that can be spent on public services. But as significant as this measure is, it shouldn’t monopolise our conversation about how to raise enough money to deliver high-quality social services. With or without these tax cuts, Australia will remain one of the lowest taxing nations in the OECD.
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The good news is that policies that would increase our revenue base without negatively impacting productivity already exist across the world, and are being advocated for here. Independent federal MP Allegra Spender has been calling for an end to fossil fuel subsidies that cost the budget $11 billion a year, and for reform to resource taxes to better capture the enormous profits made by energy companies. Reforms to company tax, particularly focused on forcing multinational companies that utilise generous offshoring arrangements to minimise what they pay would also net hundreds of millions more in revenue. Ending generous superannuation tax concessions, which disproportionately benefit the wealthy, would net $43 billion a year.
Inheritance and estate taxes have long been considered political suicide in Australia, but they’re common across the OECD. The United Kingdom, France, Germany, and even the US tax inherited wealth, but Australia abolished similar policies. When Donald Trump eventually dies, the US government will take a chunk of his wealth before its passed on to his children. Here in Australia, Gina Rinehart’s billions will flow on to her beneficiaries without the government seeing a cent.
Instead of debating these sorts of policies, for decades now both sides of politics have been promising income tax cuts at poll time as a quick and dirty way to shove money into the pockets of consumers, then reap electoral glory. The downside of those promises is clear: ailing and underfunded hospitals, schools and aged care facilities. The pressure is now on the federal Labor government to find a way to raise revenue not only to boost spending on social services but also to close the yawning budget deficit. The problem is that when the party was in opposition it was too frightened to campaign on more expansive tax policies, spooked by its experience at the 2019 election.
The long-term structural fixes the country needs will require additional revenue, but they also require political parties to make their case to the public. Getting into government by running a small-target strategy and then attempting radical change is a recipe for further distrust and cynicism, no matter how principled the policy is. Political parties shouldn’t be scared of promising voters the best health and education systems in the world, and they should be willing to argue for them to be funded.
