Potential tax system changes: A user's guide

We have just experienced enormous volumes of words on the Australian tax system. But out of that confusion we are starting to see the sort of directions that future governments are likely to head. 

So this week let me attempt to provide a form guide as to how the Australian tax system may move in the years ahead. I hope it will help you in your strategic thinking.

I am going to start with superannuation because that is where we are close to agreement with the two major political parties. I was greatly encouraged with the Treasury tax paper when it came to superannuation. 

As Eureka Report readers are well aware in the last two or three years Treasury has been producing complete and utter drivel when it comes to commentating on superannuation. They seemed to have no idea what it was about. 

But in this paper they have changed and are writing sensibly about the relationship of the aged pension to superannuation and levels of savings. I think we are going to get a tax on superannuation income in pension mode. Bill Shorten had an attempt at this which was abandoned by Arthur Sinodinos when the Coalition got to power. The Shorten attempt was to tax superannuation income over $100,000. The Shorten scheme had structural problems but it is an area where both parties can reach an agreement. 

Similarly once you have two to three million dollars in superannuation it is going to be harder to get money into the movement. But the basic pillars of superannuation which is a low tax savings environment for retirement are now in place which is good news. 

When it comes to the next area of Treasury discussion – dividend imputation – we should all be aware that if dividend imputation was halted and dividends became fully taxable it would take between 15 and 20 per cent off the value of the Australian share market. 

And given many Australians have concentrated their investments in high yielding dividend imputation stocks it would devastate the retirement assets of a big chunk of Australian retirees. In turn that would require more aged pension. The backlash will be huge so I don't think it is going to happen but a side effect of dividend imputation is that Australian companies are not investing their earnings back into their businesses. 

Longer term this is going to affect profit growth and employment. I think there is a reasonable chance that the Government might declare that if you pay more than 80 per cent of your profit out in dividends you don't get the franking credits on the top part of the dividend and then gradually move that figure down to 60 per cent of profits over half a decade or so. If such a move was undertaken gradually it would limit the effect on the stock market. But we should remember dividend imputation avoids double taxation of company profits. It is very fair. We are seeing a number of companies beginning to offer bonus shares in lieu of dividends and these shares are not taxable and do not carry franking credits. That movement might gather momentum to assist overseas shareholders that don't get franking credits. 

Then we get to negative gearing which is playing a big role in holding or boosting dwelling prices in Australia and in the process making it very difficult for first home buyers to get into the market without huge debt. But given the difficulties Australia is facing in so many areas of the economy neither party will be anxious to knock the housing market. Nevertheless I think it is likely that a curb to the amount of interest that can be offset against salaried income will come. It is likely to be grandfathered so those that have a negative gearing will have a worthwhile asset. But there is no way this can happen unless both political parties agree.

Dwelling prices in Australia are high not just because of negative gearing but due to a series of factors including migration, restrictions on supply, abundant bank lending and overseas investment. At some point there will be a much closer look to see how these forces intertwine but it is a very high risk political exercise. With interest rates headed down the combination of those forces is much more powerful than vague threats to change the negative gearing rules. Gradually negative gearing is becoming a fabric of our society and will be very difficult to change.

Last week I mentioned how families were buying houses for their children to rent as part of a negative gearing exercise (see Outer suburbs wedded to value, March 25). I could have gone further because first home buyers are buying investment houses that they often rent to their friends and similarly those same friends are buying investment houses and there is a swap deal. That way both get tax deductions on loan interest. The momentum for these sorts of arrangements is gathering intensity. 

I don't regard it as a favourable development for our society because there is no doubt that the Australian dream was built on owning a house where you live. In my view we should reduce the incentives for dwelling investment and allow small amounts of superannuation to be used to assist in buying a house. This is not a popular concept and could never be considered unless there is a move to make investing less attractive. My fear with superannuation is that our young people feel totally divorced from the movement. The way to engage them in superannuation is to use it in a small way to gain a deposit for a house. That will make for a much stronger society and one where there will be more employment and more stability. But I feel very much alone in expressing views like that. 

Meanwhile what Treasury really wants is to lift the GST and lower income and company taxes.

In the present state of politics in Australia if any party advocates higher GST they are almost certain to lose the election. Over time that may change. 

My guess is that it is easier for the ALP to introduce GST changes than it is for the Coalition. I can't see either party advocating that in the 2016 election campaign. But 2019 might be quite different. 

A number of people have observed there is no mention of the cash economy. This is not surprising because Treasury have been encouraging the cash economy by making it difficult to get an Australian Business Number but that is now improving but it needs to be automatic. 

And of course our public holiday and shift allowances are uneconomic for many business operations. Currently the staff of most smaller cafés and restaurants enter into agreements with their employees that include a cash component. You will never remove the cash economy but it will be substantially reduced if penalty rates were less severe and if Australian Business Numbers were available to all.