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The government has time on its side when it comes to stage three tax cuts, he said, but should aim for a revamped tax system as its legacy.
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Stop tinkering, get cracking on bold tax reform: BDO partner
11 October 2022
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The government should embrace a root and branch analysis of the tax system and lay the groundwork for bold reform in its October 25 Federal Budget, says BDO Australia tax partner Mark Molesworth.
He said the franking credits issue showed “the sort of tinkering that we might see announced in this Budget” but the government needed to show real appetite for reform.
“The Treasurer has been very clear that he sees this Budget as the first in a series and if that is the case, then now is the time to announce an inquiry into the reform of the tax system so that we get a root and branch approach to the analysis,” said Mr Molesworth.
“We know multinational tax changes are on the table so we’re certain we’re going to see some of the detail about the changes to the thin capitalisation rules, the rules about royalty payments to tax havens, and potentially, the public disclosure of country-by-country reporting information.”
“The recent announcement denying franking credits paid by companies that made capital raisings is also an indication of the sort of tinkering that we might see announced in this Budget but what we need is government appetite for reform that will make the Australian tax system more simple and more efficient.”
The call for tax reform comes as debate intensifies over whether the government should stick with an election pledge to implement stage three tax cuts.
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The stage three cuts were legislated by the previous government and would see the same 30 per cent tax rate for all Australians earning between $45,000 and $200,000. It was estimated to cost the budget more than $240 billion by the beginning of the next decade.
The OECD’s acting chief economist, Álvaro Pereira, said inflation would have subsided by the time the tax cuts were introduced in July 2024.
Mr Pereira told the ABC the tax cuts were an important tool as they would protect those being pushed into higher brackets due to inflation.
“Something we like about some of these changes is that they will tackle some of the issues regarding bracket creep,” Mr Pereira said.
“High inflation means that people are getting pushed to high-income brackets even when the real income does not warrant that.”
Mr Molesworth expected the government to refrain from a decision regarding the tax cuts until at least next year's budget.
“I think the size of the stage three tax cuts are up for grabs in this budget but the Treasurer may choose to wait until next year’s May budget to come to a final conclusion about that,” he said.
“The public expects fiscal policy in Australia to work hand in hand with monetary policy.”
“We don’t expect to see big revenue returns to people in the form of tax cuts but equally we don’t expect to see massive revenue-raising measures in this Budget.”
He pointed to the negative reaction to large-scale tax cuts in the middle of an inflation crisis in the UK as well as the backlash over the Queensland government’s land tax reform.
“Drawing on the UK experience, the public really has no appetite for tax cuts in an inflationary environment, and closer to home, the recent Queensland land tax experience means that the government will probably have no appetite for revenue raising where that comes at a huge compliance cost,” said Mr Molesworth.
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