8 February 2018 The Hon Scott Morrison MP Treasurer House of Representatives Parliament House Canberra ACT 2600 Treasury website online submission Dear Treasurer 2018-19 Pre Budget submission Chartered Accountants Australia and New Zealand (Chartered Accountants) welcomes the opportunity to respond to the invitation from the Assistant Minister to the Treasurer, the Hon Michael Sukkar MP, to make a submission on the 2018-19 Budget. Here are the key themes in our submission: Sustainability of the tax base The need for fundamental tax reform will not go away even if politically, it all seems too hard. The impact of intergenerational factors remain a concern from both a spending and tax collection perspective. Technological change has enabled greater globalisation and facilitated new business models which are placing pressure on traditional tax collection mechanisms. Our corporate tax and personal income tax settings are seen as uncompetitive in a world where other nations are lowering their rates. These trends support realigning the Australian taxation system to reduce our heavy reliance on income tax (both individual and corporate) and increase reliance on GST and environmental taxes. This realignment needs to be accompanied by a reinvigorated discussion of how government services can be provided equitably and efficiently through our federal system of government in the medium to long term. The government prides itself on its economic credentials and the hoped-for return to surplus over the economic cycle must remain a credible goal. Any further tax rate cuts should therefore be carefully justified on economic and distributional grounds which use realistic assumptions. Chartered Accountants Australia and New Zealand 33 Erskine Street, Sydney NSW 2000 GPO Box 9985, Sydney NSW 2001, Australia T +61 2 9290 1344 F +61 2 9262 4841 charteredaccountantsanz.com Chartered Accountants Australia and New Zealand ABN 50 084 642 571 (CA ANZ). Formed in Australia. Members of CA ANZ are not liable for the debts and liabilities of CA ANZ. 2 There are longer term risks of reducing tax collections at a time when Australia’s: Return to surplus is only barely in sight, with spending pressures difficult to contain Commonwealth debt is at historically high levels as a share of GDP (alleviated for the time being by historically low interest rates and a growing economy), and Our fiscal position is impacted by variables the government cannot control, such as interest rates, commodity prices and global economic growth (although the latter is currently displaying a favourable trend). Despite the government’s on-going debt reduction efforts, our economy remains at risk should Australia experience a significant negative economic shock. In this context, geo-political factors and the rise of economic nationalism are key concerns. To be effective in a practical sense, any proposed tax cuts should also be meaningful for the target group. We see little point in a reduction which attracts Senator Amanda Vanstone’s withering description of the 2003 Budget tax cut as barely enough to fund a “sandwich and a milkshake”. In terms of funding a personal income tax cut, some of the black economy measures under consideration could provide the means, although there will be some delay in the receipt of revenue due to the need to have realistic implementation time frames. For the longer term however, we remain of the view that fundamental reform of the tax base is needed to achieve more sustainable revenue streams. We reiterate our support for changes to the base and rate of GST. For the personal tax base, a broader ‘tax reform bargain’ is required – particularly if the government intends to make changes to the treatment of work-related deductions. Chartered Accountants therefore calls on the Government to use the Budget as a platform to “talk straight” to the Australian people about the economic and social risks ahead for our Commonwealth, using Treasury modelling and input from other trusted sources. Research about what a sustainable tax framework looks like should be released not as a policy document, but to encourage informed debate, particularly in view of the looming Federal Election. We urge the Government not to make piecemeal changes to the tax system in this Budget. Such changes risk portraying the Government as populist and devoid of any big picture, long-term strategy. It gives only the appearance of genuine tax reform, without any grand bargain with the Australian people which shares with them the rewards of a simpler, sustainable tax system. The tax system plays a role in addressing inequality, but all Australians need to pitch-in It is clear that equality is an important issue for Australians and politically, will be a central theme in the next Federal election campaign1. In terms of the role that taxation plays in the debate over income inequality however, our fear is that Australians have been encouraged to believe that extra tax can always be extracted from “someone else”, or piecemeal changes to the tax and superannuation law are acceptable because they only impact a small percentage of Australians. The reality is that a sustainable revenue base requires everyone to contribute to support community services. That means changing entrenched community attitudes, such as: Over-claiming worked related income tax deductions is “all right” 1 Refer Opposition Leader Bill Shorten’s speech to the NSW Labor Conference, 30 July 2017: http://www.billshorten.com.au/address_to_the_new_south_wales_labor_conference_sydney_sunday_30_july_2017 charteredaccountantsanz.com 3 Paying cash to receive cheaper goods and services helps “battlers” The 2018-19 Federal Budget provides a unique opportunity to engage with the community on these important issues as for the first time, the government has at its disposal detailed tax gap research on individual taxpayers, small business, privately owned groups and the black economy. The government also has the Final Report of the Black Economy Taskforce which is yet to be publicly released. The black economy should be a key Budget focus The Black Economy Taskforce’s Interim Report notes that: “Operating in the black economy gives an unfair competitive advantage to businesses and workers and distorts economic activity. Those who meet their tax and other regulatory obligations are directly penalised. From an economic perspective, a dual tax and regulatory system (one legitimate, the other ‘black’) takes resources away from their most productive uses.”2 The Interim Report contained a number of valuable ideas that could be announced in the Budget regarding: The hardwiring of government (or “joined-up” government) which acknowledges tax compliance as a key eligibility criteria for the “social licence” we enjoy to access government services Government leading by example (for example, requiring suppliers to possess a “tax clearance certificate” before gaining contracts to provide goods or services to the government sector) Improved tax reporting and collection mechanisms Ensuring sharing economy participants contribute equally to those in the traditional economy. Australia’s tax system is too complex and our approach to tax policy making is poor In a difficult political climate, it is tempting to make Budget tax announcements which are narrow in their scope and punitive for a particular, typically small or non-voting segment of the taxpayer population. A plethora of “announceables” rarely addresses broader policy ramifications, creates enforcement problems, raises only modest amounts in the overall scheme of things and goes nowhere near the big picture reforms Australia requires. They confuse taxpayers and add to red tape. In the meantime, acknowledged problems with Australia’s tax rules continue to appear too hard to fix3. Chartered Accountants notes the growing list of announced but not yet enacted measures and expresses particular concern regarding the proposed changes to Division 7A which were announced in general terms in the 2016-17 Budget but have not been enacted4. 2 https://consult.treasury.gov.au/tax-framework-division/black-economy-taskforce/supporting_documents/BE_IR.pdf 3 Evidenced for example in Board of Taxation reports to which the government has not responded. 4 In the 2016-17 Budget, the Government announced it would make targeted amendments to improve the operation and administration of Division 7A ITAA 1936, with the amendments to apply from 1 July 2018. charteredaccountantsanz.com 4 Chartered Accountants therefore calls for a work in progress document to be published by Treasury in association with the Minister for Revenue’s office, along with an overall timetable of consultations. We also call upon the Government to embrace New Zealand’s Generic Tax Policy Process. This would require all proposed tax measures to pass through the five distinct phases of that policy process, from the conceptual to the implementation phase5, and that there should be greater transparency around the policy setting process, with the public release of Officials’ Papers (as occurs in New Zealand). Greater transparency of Government budgeting Sound information and a thorough understanding of the long term policy implications should underpin every Budget. The short term impact of a policy on the size of government and the size of the deficit are not sufficient measures. We should put aside the size of government as a fiscal rule and instead initiate a public debate on the appropriate size of government in the context of the appropriate role