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Lies, damn lies and statistics: The real story behind the tax reform debate

April 2016 

The upcoming May 3 Budget is likely to contain some of the anticipated structural reforms expected but shy away from the populist policy decisions touted in the media such as the removal of negative gearing.

The upcoming May 3 Federal Budget and general election due to fall later this year has put tax and tax reform on the agenda – again. While there is likely to be some structural reforms, it's likely that the Government will shy away from populist decisions touted in the media such as the removal of negative gearing.  The debate around tax reform has been buffeted by the position of various interest groups and how to re-cut the revenue pie, but the debate often overlooks the implications for tax. 

So what does the landscape truly look like for tax reform? 

Australia: A snapshot of taxpayers

Looking at the statistics for, it's easy to see how the tax debate can become easily skewed. Any policy that offers broad-based income tax cuts, concessions or incentives is immediately going to benefit higher income earners because they pay more tax. 

Consider the statistics:

  • Australia has a working age population of 15.6 million
  • 81% of those people paid income tax totalling just over $166 billion
  • 2.9% of all taxpayers are very high income earners with incomes above $180,000 and contributed almost 30% of all income tax collected. 
  • The largest contribution from income tax comes from 16.6% of taxpayers who earn between $80,001 and $180,000
  • 2.6 million of our working age population pay no tax and 5.6 million pay on average $1,400. 
It's easy to see that 8.2 million Australians earning no or low incomes do not benefit from a tax cut because their contribution is negligible, however it is difficult to argue that there is not an impact on those who are earning low incomes. 

The negative gearing debate

One of the recent areas of fierce debate is in the benefit of negative gearing for higher income earners. Negative gearing only really works as a strategy if a taxpayer has enough tax to off-set rental losses. 

In 2013-14, rental interest deductions claimed cost $21.4 billion. When you include other forms of deductions such as capital works for rental properties, the figure rises to $42.5 billion. 

Let's provide some context here: The total Australian Defence budget for the same period was $25.3 million. 

But, negative gearing is not a concession; it's part of the broader tax system that allows deductions to be claimed against income producing assets and as such is not something that can be easily turned on or off simply for rental properties.  

The Superannuation concession benefit

Taxpayers with the most income and wealth benefit most from superannuation concessions, because it is an attractive savings and wealth management vehicle for middle and higher income earners because of the highly concessional tax treatment of contributions and earnings.  

The reason why very high superannuation balances in particular are targeted for change is because it's difficult to argue that the account balance is solely for retirement purposes as opposed to wealth management or estate planning purposes.

The social welfare system

The other side of the equation is the social welfare system, which is an essential part of any strong community.  The latest statistics show that 27.5% of Australia's working age population receive some form of welfare, which is lower than its peak of 31.4% in 2002. 

The age pension makes up 46% of all people who receive welfare. It's not hard to see from this statistic the reason for some of the previous policy decisions to tighten assets tests and extend the access age to the pension.

Cutting through the noise

In the lead-up to the election and the ongoing debates around tax, concessions and welfare, the fundamentals of the economy are continuing to prove challenging for the Government to communicate to the electorate in a way that contextualises the reform debate effectively. 

How will the upcoming budget impact you? 

We will be providing a post-Budget commentary on policy announcements, tax changes and the implications for you and your business. It will be interesting to see whether the Turnbull/Morrison budget nips and tucks around the edges or aims for real reform. Follow us on Twitter for Budget Night commentary.

 


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Disclaimer

This article is provided for information purposes only and correct at the time of publication. It should not be used in place of advice from your accountant. Please contact us on 02 9957 4033 to discuss your specific circumstances.

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