Not Back in Black - potential for tax reform?
We’ve all taken on some debt in our lifetime. A credit card, a car loan and most of us will have a mortgage at some point.
But what if your debt was $829 billion and predicted to rise to $963 billion by the middle of 2022?
That’s the current outlook for the Australian Government.
Now this isn’t all new debt from having to pay the Covid costs of Jobseeker etc. as even the 2019 debt level was around $530 billion. Government regularly have debt in their accounts for the same reason I advise many of you to not overpay your mortgages – if you can create increased revenue elsewhere for less than the cost to service the debt, it’s a sensible strategy.
However, a debt is still a debt and must be repaid sometime. This isn’t a problem unique to Australia of course – the USA and UK have all increased taxes in this year’s budgets.
Both of these countries did so in different ways – the UK raising ‘National Insurance’ an income tax that applies on earnings for those up to the highest tax bracket from 10% - 12%.
The USA targeted the top end of town with increases in personal tax and capital gains tax.
Australia has yet to propose its solution for the obvious reason that we are due an imminent election. The Government probably hoped to call this in November on the back of a successful vaccine roll out. The shutdowns of two of the major state curtailed this option so we can expect this to now happen in the early part of next year.
My views on some of the areas they could target –
Income Tax
This is the most obvious area but also relatively unlikely 9and most unpopular for someone seeking election.) The Government is currently 2/3rds of the way through a 3-step simplification of the income tax system, with the final stage due in 2024.
Having worked hard to gain opposition support for the plan, it is unlikely either side would go back on this, leaving the other an open goal in the campaign.
Superannuation
In the meetings I’ve had with client sin the last few months, this has come up most times. My opinion is that changes to post retirement Superannuation treatment (the tax-free stage) are very unlikely. The Government would face a significant backlash from people who’d planned their retirements only to find that taxation left them running out of money sooner – which would then lead to more claims on the state pension. A lose-lose for the Government.
Changes to the tax in accumulation phase (15% on pre-tax contributions and 15% on dividends and income earned) could be a potential revenue source. Unpopular yes (all these solutions are) but a raise that wouldn’t hit the current pockets of taxpayers might slip through with less resistance.
GST
The 10% tax on goods and services may well be an option for the Government. It is widely viewed as a n equal tax as a millionaire buying a loaf of bread pays the same GST as a low-income earner.
But equally there would be push back that higher earners weren’t paying their share. Furthermore, it presents a problem to Governments when faced with the inflation pressures we currently see – making standard goods even more expensive.
Interest Rates
Not much wriggle room here, with rates at all time lows. But there has never been a rule out of negative interest rates which some countries have used to good effect.
A good way to encourage economic activity but bad for social problems such as housing affordability which are already spiralling on the back of cheap loans.
Also, interest rates are controlled by the central bank who aren’t afraid to stand up to any pressure for change by the government.
Company taxes
Companies pay tax on profits at 30% (25% for those with revenues under $50m.) Again, it is a double-edged sword to look at this area. It’s always popular with voters to see big companies paying their shares but with the ease most companies can base their headquarters around the world, it is detrimental to the economy to be uncompetitive.
Instead, the Government would like seek incentives to companies to hire more staff rather than tax them further.
As you’d expect, no easy answer. If I was to place my bets on any outcome, I’d expect a slight increase in GST at some point and possibly a delay to the Income tax changes due in 2024.
We will wait to see how each party spins their strategy in the new year!