tax survey 2013

tax reform survey 2013Square pegs and round holes

contents

“If a square peg doesn’t fit a round hole, neither the peg nor the hole is to blame...the question is “whose fault is it?” Jeffrey Bryant (american B.1965)

Introduction .....................................................................................................4

About the survey ............................................................................................. 5

The Government should revisit most of the Henry recommendations. .......................................................................................... 6

A review of the GST is essential to any discussion of tax reform. ........................................................................................................ 7

Australian businesses are spending an increasing and unreasonable amount of time and resources on tax compliance. .................................... 8

Our tax system is easy to understand and compliance is easy. ............... 8

The current tax system adequately caters for the Small Medium Enterprises sector ......................................................................... 10

The current tax system adequately caters for larger public and private companies ................................................................................. 10

Australia’s tax system is competitive with those of our international counterparts. .......................................................................... 12

The tax system promotes Australia as a desirable location for regional headquarters and investment ...................................................... 12

There are too many different forms of taxes being paid by Australian businesses. ...................................................................................14

The highest personal marginal tax rate and the company tax rate should be aligned. ........................................................................... 15

The Government should consider taxing trusts as companies. .............. 16

The capping of superannuation contributions is inconsistent with the original policy of the superannuation scheme of Australia. .................................................................................................... 17

The MRRT is appropriate ............................................................................. 18

A ‘super profits’ tax should be implemented on other industry sectors, for example banks. .......................................................... 18

Reforms to allow the limited carry back of tax losses by companies were worthwhile. .......................................................................20

Proposals to reduce the corporate tax rate should not be funded by the removal of a range of tax concessions for some taxpayers. .............................................................................................20

Finding the right fit........................................................................................22

About BDO .....................................................................................................23

2 Tax RefoRm SuRvey 2013

Tax RefoRm SuRvey 2013 3

Once again, we asked you to ‘have your say’… once again, you delivered.

In 2011 BDO ran its inaugural Tax Reform Survey. We found that the taxpayers of Australia were frustrated with the seemingly slow pace of tax reform and the complexity of the current tax system.

Building on this base, between October and December 2012 we asked Australian taxpayers to participate in our second annual Tax Reform Survey. In doing so, we sought to revisit many of the areas of frustration identified in the previous survey, and to ask whether any of the tax reform initiatives in the intervening period had addressed any of the concerns raised.

We found that not much had changed, that the frustration continues and that the right fit continues to elude us.

Still trying to put a square peg in a round hole

For the second year running BDO has asked you to have your say. Once again you have given of your time to help us advance the case for tax reform in this country. Once again, the message to politicians of all persuasions is clear – the taxpaying community can see through the rhetoric and is not impressed by what lies beneath. Despite the Henry Review now being almost four years old, true reform that is the right shape for Australia’s future growth and prosperity continues to be a dream.

Since our last reform survey we have seen a Tax Forum, the establishment, and lack of outcomes from the Business Tax Working Group, the introduction of limited loss carry back measures for companies, the announcement that there will be no surplus this year, and new measures targeted at shoring up the revenue base through the amendment of the anti-avoidance provisions, and the international transfer pricing rules.

introduction

Surely with all of this action, we should see some positive moves in the responses to our questions?

With this in mind, this year’s survey on tax reform, aimed to:• Harness the views of our clients• Give public voice to the issues impacting on them• Highlight the areas and types of tax reform important to them.

In addition to this survey contributing to longitudinal data, we also wanted to see whether the action in the tax arena had convinced our clients that real tax reform had occurred.

The results contained in this report are gathered from the responses of more than 100 respondents to the survey, and range across the spectrum of Australian taxpayers. By contributing to the necessary debate about tax reform, clients are performing a public service. Rather than allowing lobbying and reform to be considered behind closed doors, the views of survey respondents bring the trade-offs and frustrations that the tax system engenders into the light of day.

In reviewing the survey results it is clear that taxpayers want fair and reasonable reforms that don’t pick winners and losers. They seek reforms that are easy to understand, and that will go some way to reducing the administrative burden they feel they carry under the weight of the tax system.

So, did our respondents think that real tax reform had occurred? Judging by the responses, the answer is no. There is also a clear message coming from those who took the additional time to respond with written comments – they can see the action being taken and the public statements on tax reform, and they are not convinced that the reality matches the rhetoric.

It is clear that the efforts towards reform have continued to try to fit a square peg in a round hole.


about the survey

tyPe Of OrGaniSatiOn

2011 2013

Private company 51% 60%

Public company 23% 22%

Not-for-profit entity 9% 11%

Other 17% 7%

inDUStry

The top five industries that responded were:

rank 2011 2013

1 Finance & Banking Professional Services

2 Property & Construction Finance & Banking

3 Health & Medical Property & Construction

4 Technology, Media & Telecommunications Natural Resources

5 Natural Resources Technology, Media & Telecommunications

tUrnOVer

The participants’ organisations’ annual turnovers were spread:

2011 2013

<$50 million 60% 65%

$50 million – $150 million 20% 15%

>$150 million 20% 20%

yOUr cOmmentS

“I know it’s a dream – but it’s important to try to separate the need for a fair taxation system from politics.”

“The current tax system needs to be simplified. There are so many ad-hoc rules designed to capture minor amounts of tax. A simple well defined system based on simple English is what we need.”

“The current system is an invitation to rort the tax system while costing taxpayers and the Government time and money [by] ensuring they visit every corner of the tax legislation.”

BDO cOmmentS

A broad cross-section of the taxpayer community has taken part in the public debate on tax reform through this survey. The opinions expressed in the survey should be heeded by Government as they represent honest and unfiltered responses from key taxpaying demographics.

BDO cOmmentS

“It appears that not-for-profits understand – correctly – that they are being drawn into the tax reform debate.”


0

10

20

30

40

50

STRONGLYDISAGREE

2.8%

DISAGREE

6.6%

NEITHERAGREE OR DISAGREE

15.1%

AGREE

44.4%

STRONGLYAGREE

31.1%

We aSkeD

The Government should revisit most of the Henry review recommendations.

There was almost no change in the percentage of respondents who harked back to the Henry Review (77% in 2011). As we noted last year, the integrity of the tax system is a function of its equity and simplicity. It seems that survey respondents believed the Government when it billed the Henry Review as a once in a generation tax reform opportunity.

Interestingly, however, respondents had a different view of the Tax Reform Forum held by the Government in October 2011. Only 11% felt the Forum was a productive use of time and resources. 59% disagreed, suggesting that it was all a waste of time. A huge 30% neither agreed nor disagreed – perhaps all of the talk just passed them by.

A similar message was sent by survey respondents when asked to consider whether there was ‘too much talk and not enough action in the tax reform area’. 90% agreed with this statement.

The message seems clear. Having been promised ‘root and branch’ reform of the tax system from the Henry Review, taxpayers want to see those recommendations fully considered.

In our view it is incumbent upon the Government to come out with a clear and manageable timetable for dealing with the recommendations made by the Henry Review which goes beyond the current electoral cycle. As we said last year, the continued integrity of the Australian tax system requires taxpayers to have clarity around the likely timing of major reforms.

BDO cOmmentS

“Having been promised ‘root and branch’ reform of the taxation system, the taxpayers of Australia expect their Government to follow through. Implementation of the reforms proposed by the Henry Review continues to be the most likely path towards a well fitting taxation system.”

yOUr cOmmentS

“I believe that we need a completely new, efficient taxation system. My suggestion is that [we] should lobby for bilateral political agreement for the introduction of a new system ten years from now.”


0

5

10

15

20

25

30

35

40

STRONGLYDISAGREE

DISAGREENEITHERAGREE OR DISAGREE

AGREESTRONGLYAGREE

35.8% 35.8%

11.3% 12.4%

4.7%

We aSkeD

A review of the GST is essential to any discussion of tax reform.

Among the survey respondents there was strong agreement that the GST needs to be considered as a part of any meaningful tax reform discussion. Because of this interest in the GST, further questions were asked in this year’s survey about what could be done with the GST. Interestingly:• 44% of respondents disagreed when presented with the statement

that ‘the GST rate should never exceed 10%’ (compared to 38% who agreed that it should never exceed this percentage)

• 46% agreed that the GST rate should be increased to fund the abolition of state payroll taxes and stamp duties (40% disagreed with this proposition)

• 43% agreed that changing the GST rate was a good idea in order to enable a cut to personal tax rates (38% disagreed).

Therefore, there was an almost even split between people who thought that the GST rate should be increased and those who did not, with a slight majority to the rate raisers.

In our view, the more telling result was in response to the statement ‘all GST exemptions should be abolished to simplify the system.’ 60% of respondents agreed that this was a good idea, compared to 24% who disagreed.

Respondents to our survey seem to be able to differentiate between what is good for them (as judged by the responses to the questions about raising the rate of GST) and what may be good for the system (by simplification and base broadening). This sends a clear message that a well thought out policy in relation to tax will be more attractive to taxpayers than a simple, ‘we’ll make you better off’ campaign.

To consider significant tax reform in Australia without taking into account the opportunities presented by GST seems short-sighted, particularly when taxpayers seem to be able to differentiate between short term impacts on them, compared to long term impacts on the taxation system and the economy more generally.

yOUr cOmmentS

“Our taxation system needs simplification – start with GST on all things at the same rate and use [it] to abolish other taxes.”

BDO cOmmentS

“GST and other indirect taxes on consumption represent approximately 30% of the tax mix. Any review of the tax system that excludes meaningful discussion of these taxes simply cannot be effective.”


0

10

20

30

40

50

60

STRONGLYDISAGREE


AGREESTRONGLYAGREE

54.7%

30.2%

12.3%

1.9% 0.9%

We aSkeD

Australian businesses are spending an increasing and unreasonable amount of time and resources on tax compliance.

We aSkeD

Our tax system is easy to understand and compliance is easy.

Consistently with 2011, when 80% of respondents agreed with the comment on spending an increasing and unreasonal amount of time on tax concession, and 94% disagreed that our tax system is easy to understand and comply with, these questions led to one of the most consistent responses of the survey.

It is an unfortunate reflection on Australia that the implementation of reform and ‘simplifications’ to the tax system usually requires the imposition of unwieldy reporting and administrative arrangements on taxpayers.

As just one example, the payment reporting rules for the building and construction industry, introduced this year, require taxpayers to consider:• Whether they are in the building and construction industry under any one of three tests• Whether each particular payment they make to a creditor is made in relation to building or

construction services (the list of which takes up a page of legislation and a longer section of the explanatory material).

If the taxpayer determines the payment is so related, they are required to report annually on the amounts of such payments made to each creditor. There is no obligation to withhold tax from the payment – the system seems to create paperwork that will be used, we presume, to ‘data match’ against recipients’ tax returns.

2.8%

57.5%

32.2%

4.7%

2.8%

STRONGLYDISAGREE

DISAGREENEITHER AGREEOR DISAGREE

AGREESTRONGLYAGREE


BDO cOmmentS

“Surely ‘simplification’ and ‘integrity’ can be achieved without constantly increasing the burden on taxpayers.”

yOUr cOmmentS

“Too many penny pinching changes have been made over the years. It’s time to strip it all back to the bones and start again”


STRONGLYDISAGREE


AGREESTRONGLYAGREE

0.9%

7.5%

32.1%

45.3%

14.2%

0

10

20

30

40

50

STRONGLYDISAGREE


AGREESTRONGLYAGREE

0

5

10

15

20

25

30

35

40

3.8% 4.7%

29.3%

37.7%

24.5%

We aSkeD

The current tax system adequately caters for the Small Medium Enterprises (SME) sector.

There is a consistent theme between our 2011 and this years surveys in relation to these above statements. Among larger corporates, the view about whether the current tax system caters for their needs is fairly evenly spread (and just as many participants are non-committal, as disagree with the proposition). SMEs on the other hand overwhelmingly believe that the system does not cater for them.

Analysing the written comments from respondents, it would appear that this is not so much to do with a lack of concessions or the imposition of clearly inappropriate taxes, but more to do with the perceived complexity of the system. This complexity requires them to commit a substantial amount of time and financial resources that SMEs have limited access to.

They also perceive that those with greater resources are able to devote more of those resources to taking advantage of the tax system. SMEs would appreciate a levelling of the playing field, even if that means exempting them from some of the more technically onerous and time consuming of their tax obligations. SMEs would appreciate the Government taking a cost-benefit approach to such obligations, rather than chasing every dollar of tax revenue.

This is not to say that larger companies are necessarily happy with their lot. Where complexity pervades the system, all taxpayers incur costs to deal with that complexity.

yOUr cOmmentS

“Differential tax rates based on company size and ownership status. Lower rates for Australian owned companies. Higher rates for companies with overseas shareholdings (proportional to overseas ownership percentage). Taxation rate based on turnover for subsidiaries of overseas companies to prevent transfer pricing, unless sufficient profit is declared.”

We aSkeD

The current tax system adequately caters for larger public and private companies.


BDO cOmmentS

“60% of participants believe the current system does not adequately cater to the SME sector. This compares to only 34% holding the same view in respect of larger private and public companies. The Government must consider how the burden can be eased on SMEs.”


STRONGLYDISAGREE


AGREESTRONGLYAGREE

0.0%

10.4%

26.4%

42.5%

20.7%

0

10

20

30

40

50 1.9%

6.6%

35.8%

36.8%

18.9%

STRONGLYDISAGREE


AGREESTRONGLYAGREE


We aSkeD

Australia’s tax system is competitive with those of our international counterparts.

We aSkeD

The tax system promotes Australia as a desirable location for regional headquarters and investment.

Australian Governments of various political persuasions have, in recent times, made efforts to promote Australia as an internationally competitive and attractive destination for foreign investors. These measures included:• The introduction of CGT exemption for non-residents• Conduit foreign income dividend withholding tax relief• Regional headquarter concessions.

However, the survey indicates that respondents think more must be done to simplify the complexity and encourage investment.

It is likely that the lack of consultation with affected taxpayers, such as the last budget announcement doubling the rate of withholding tax for certain international investors in Australian managed funds, has led to a perception that investment in Australia has an element of sovereign risk attached to it.

Further, while non-residents have concessions in the tax system to encourage them to use Australia as regional headquarters, Australian based entrepreneurs who are seeking to expand internationally face complex legislation in the form of ‘controlled foreign company’ rules. The sheer volume of such rules, and the difficulty that taxpayers have in proving they comply with them, calls out for reform.

In particular, questions need to be asked about a tax system that encourages foreign investment via Australia and discourages foreign investment and the taking of entrepreneurial risks by Australians.


BDO cOmmentS

“The survey results act as a call to Government to consider how to ensure that Australia improves its attractiveness as a launching pad for internationally focussed Australian entrepreneurs as well as an investment destination for foreigners.”

yOUr cOmmentS

“The biggest need is to attract investment and build exports. The tax structure – both corporate and individual – needs to recognise this. A big picture government will see that increased tax comes from increased business activity, not increased tax rates.”

STRONGLYDISAGREE


AGREESTRONGLYAGREE

50.0%

34.8%

5.7% 5.7%3.8%

0

10

20

30

40

50


We aSkeD

There are too many different forms of taxes being paid by Australian businesses.

A consistent theme across both years seems to be that it is not just the complexity of any particular tax that bothers taxpayers – the number of different taxes and administrative touchpoints with governments is just as much a concern.

A particular concern of respondents is the number of state based taxes they perceive as inhibiting business growth and business transactions. The elimination of taxes such as payroll tax and stamp duties continue to dominate the comments gathered by this year’s survey.

It must be acknowledged that the elimination of these taxes without significant other reforms to the rate and base of the balance of the taxes payable in Australia is just not possible. However, there are some immediate practical steps that could be more easily implemented. These include: • The amalgamation of the registration processes for all taxes onto

one form• The creation of one administrative body for all taxes• A single collection authority for all taxes, which will act as a clearing

house, paying the appropriate percentage of receipts to each government.

In our view, such reforms could be implemented within a relatively short period of time, were all state and federal governments to agree. It is hoped that the governments involved could put aside their political posturing for long enough to take actions that will be in the best interests of Australian businesses.

BDO cOmmentS

“While taxation must be a fact of life, the governments of Australia should ensure the administrative cost on business of collecting that tax is minimised. We call on all governments to agree to the relatively simple and painless measures that will enormously benefit the taxpaying community of Australia.”

yOUr cOmmentS

“When the GST was originally introduced, part of the net benefit to States was to eliminate the need for inconsistent state-based taxes such as pay-roll tax and stamp duties. These reforms were not followed through.”

STRONGLYDISAGREE

6.7%


21.7%

AGREE

26.4%

STRONGLYAGREE

20.8%

0

5

10

15

20

25

30

24.4%


We aSkeD

The highest personal marginal tax rate and the company tax rate should be aligned.

This was one area where there was a significant shift in sentiment between the 2011 survey and this one. In 2011, 63% of respondents agreed with aligning the rates. The gap between the top individual tax rate and the company tax rate is perceived by tax authorities, and some in the community, as allowing some people to pay substantially less tax than others with the same income. Were the rates to be aligned, there would be no incentive or benefit to defer tax by ‘trapping’ income in closely-held companies.

It should be noted that for resident taxpayers this is only a difference when tax is paid, not usually a difference in the overall tax payable. This is because resident shareholders of Australian companies are taxed on dividends received, but are credited for Australian company income tax on the profits from which the dividends are paid. Hence, company income tax in Australia effectively acts as a withholding tax on income residents earn through a company.

When looking at whether to move the company tax rate up, or the individual tax rates down, it would appear that our survey participants would prefer that the individual rates be changed – but not by much. 30% felt the individual rates were appropriate, but only 37% felt the company tax rate was appropriate.

Governments are caught in a cleft stick. To reduce individual tax rates, additional revenue will have to be found from other, politically challenging, sources. But to increase the company tax rate will reduce Australia’s international competitiveness.

Bringing the two rates into line may be a political decision that is just too hard to get right.

BDO cOmmentS

“The debate about aligning these rates could perhaps be more productively restated as a debate about the appropriateness of the anti-avoidance provisions aimed at stopping the warehousing of income in companies.”

yOUr cOmmentS

“To my mind the company tax rate is a white elephant as it ensures profits are not distributed into the community. Thought should be given to the company tax rate mirroring personal rates.”

0

5

10

15

20

25

30

35

STRONGLYDISAGREE


AGREESTRONGLYAGREE

13.2%

33.0%

19.8%21.7%

12.3%


We aSkeD

The Government should consider taxing trusts as companies.

The debate about the taxation of trusts tends to polarise taxpayers and government alike. On the one hand, trusts are used by taxpayers and the courts to achieve protection of property for the benefit of others. In most cases, the taxation outcomes flow naturally and appropriately.

The alternative position, advocated based on the misdeeds of very few taxpayers, is that trusts are used by the wealthy to avoid tax by exploiting perceived defects in the rules regarding the taxation of trusts.

Recent legislative amendments to ‘cure’ some of the defects in the current regime for the taxation of trusts have introduced new complexities to their operation. Further, these are intended to be short term fixes to the problems, while the Government consults on the future system for the taxation of trusts. Taxing trusts as companies is one of the solutions sometimes proposed in this regard. If this position was adopted, it would reduce some of the complexity associated with taxing the differences between accounting and taxable income, at the expense of some of the taxation benefits currently enjoyed by trusts and their beneficiaries.

It should be noted that taxing trusts as companies is not the only option. One compromise solution may be to have simplified rules that tax trusts like companies on an elective basis. Under such a system taxpayers could make a choice between: • A simplified taxation system, at the expense of the tax benefits

currently available to trusts, and• Remaining in the current, far more complex system while retaining

those benefits.

There are strong commercial reasons for the existence of trusts. Any attempt at establishing a ‘level playing field’, should be focussed on ensuring the use of trusts for their intended purpose is not impacted.

BDO cOmmentS

“Any change in the taxation of trusts must take into account the effect on various stakeholders, including those sectors of the economy that draw heavily upon their use.”

0.9%

8.5%

9.5%

23.6%

57.5%

STRONGLYDISAGREE


AGREESTRONGLYAGREE


We aSkeD

The capping of superannuation contributions is inconsistent with the original policy of the superannuation scheme of Australia.

The Government’s aim is to encourage all Australians to save for their retirement by allowing superannuation savings to be taxed concessionally as they are being accumulated, and to reduce or limit the taxation of retirement benefits for older Australians.

However, the Government has, since 2007, introduced additional rules around superannuation contributions. In particular, the restrictions on the ability to make contributions is seen by survey respondents as being in direct contradiction of the intention to make taxpayers save for their own retirement.

Against this, the concessional tax treatment of amounts in superannuation means the Government sacrifices revenue each time a superannuation contribution is made.

Complexity in superannuation rules means that equity in superannuation and the willingness to participate in the superannuation system is eroded. This will inevitably lead to fewer people making contributions to their own retirement and greater reliance on the public purse by older Australians.

By far the largest number of comments received in our survey related to superannuation, and all of them called for the contributions system to

be liberalised or for the constant changes to the superannuation system to cease. The percentage of respondents agreeing with this question increased from 75% in 2011 to 80% in this survey.

Tax reform should be aimed at preserving equity and encouraging participation in the superannuation system. The taxation and compliance rules are already complex as they relate to superannuation. Tax reform should aim to make it easier for the ordinary Australian to understand what and how to contribute to superannuation, to provide for their retirement, and encourage them to do so.

BDO cOmmentS

“More must be done to encourage and allow people to make contributions to the cost of their own retirement. Simply focussing on the contributions stage ignores the ability for the Government to recoup revenue during the investment and withdrawal stages of the superannuation cycle.”

yOUr cOmmentS

“Superannuation should be considered as a retirement scheme not a tax making scheme by the Government.”

“The recent halving of the [contribution] allowance from $50,000 to $25,000 is just beyond comprehension.”

STRONGLYDISAGREE


AGREESTRONGLYAGREE

11.3%

23.6%

17.9%

20.8%

26.4%

0

5

10

15

20

25

30

22.6%

18.9%

14.2%

26.4%

17.9%

STRONGLYDISAGREE


AGREESTRONGLYAGREE


We aSkeD

The Minerals Resource Rent Tax (MRRT) is appropriate.

We aSkeD

A ‘super profits’ tax should be implemented on other industry sectors, for example banks.

The Government’s revenue targets for the MRRT have come under intense scrutiny as has the revenue argument between the States and the Federal Government. Further, having so few taxpayers liable for the tax, the fact that revealing the aggregate MRRT collections could identify the individual taxpayers, is of concern. All of these factors are reflected in the continued disagreement by survey participants that the MRRT is appropriate.

It is interesting that a significant number of our respondents also continue to think that a tax on other taxpayers who are perceived to be making ‘super’ profits would be justified. Fitting the public perception of who should be taxed with good tax policy will require clear and understandable communication from politicians.

This points to an interesting dilemma for the Government. There appears to be some support in the community for a tax on those who are perceived to be able to afford it. However, such taxes can end in distortions of taxpayer behaviour as taxpayers do whatever they need to do to avoid being seen as ‘super’ profitable. Ultimately, adding additional taxes to the economy at a time when the public is crying out for simplification is fraught with difficulty. The revenue benefits have to outweigh both the economic drag of the new tax, and the political capital consumed in pushing through a new tax.


BDO cOmmentS

“The addition of the Minerals Resource Rent Tax is yet to show any particularly positive returns to the Australian tax system – either by way of revenue raising or complexity reduction.”

yOUr cOmmentS

“I believe [the MRRT] should be across all mining companies, more in line with the original intention.”

0

5

10

15

20

25

30

35

40

STRONGLYDISAGREE


AGREESTRONGLYAGREE

9.4%

33.0%

38.7%

13.2%

5.7%

13.2%

12.3%

1.9%

51.8%

20.8%

STRONGLYDISAGREE


AGREESTRONGLYAGREE


We aSkeD

Reforms to allow the limited carry back of tax losses by companies were worthwhile.

We aSkeD

Proposals to reduce the corporate tax rate should not be funded by the removal of a range of tax concessions for some taxpayers.

Both of these reforms were proposed as a part of the October 2011 Tax Forum and were reviewed by the Business Tax Working Group (BTWG) that it spawned. Only the loss carry back measure was implemented, because the BTWG was unable to reach a consensus on how a general company tax reduction was to be funded.

At one level the loss carry back measures were welcomed by corporate taxpayers. However, the limitation of the reform to companies, and the requirement that the company have franking credits sufficient to fund the carry back, meant that many SMEs were unable to take advantage of the measure. This is reflected in the relatively low support rates for the measures among survey respondents.

For a measure that the government announced as being of great benefit to taxpayers, we were surprised at the relatively low support rate, and the large number of respondents who were apparently ambivalent about the measure. The result reinforces our view that the taxpayers of Australia are very good at separating Government spin from tax reform reality.

The decision by the BTWG to recommend against reducing the company tax rate because of a lack of consensus about where any such rate cut was to be funded from is strongly supported by our survey responses. The majority view was that removing entrenched tax concessions from the system in order to reduce the corporate tax rate was not the right course of action. Again, it appears that taxpayers’ sophistication is underestimated. They realise that, under our franking system, corporate tax is effectively a withholding tax on behalf of resident shareholders, and that a decrease in the rate does not necessarily assist their personal tax liabilities.


BDO cOmmentS

“The results show a level of sophistication among taxpayers that the Government would be wise to heed.”


finding the right fit

thrOUGhOUt OUr analySiS Of the reSPOnSeS tO thiS SUrVey, We Were cOntinUally StrUck By the metaPhOr Of tryinG tO fit a SqUare PeG in a rOUnD hOle.

Amendments and ‘simplifications’ to the tax system seem to continually be drafted in order to avoid offending against vested interests or, perhaps worse, to fit the political agenda, all resulting in unintended consequences for taxpayer behaviour.

Perhaps the question we need to ask is – are we even going about this in the right way? Should we continually try to retrofit tax reform onto an already complex system? We keep asking our legislation to fit ‘square pegs in round holes’. Using the ‘square peg’ analogy, would we be better to try to fit a ‘round peg in a square hole’? After all, round pegs fit in square holes better than square pegs in round holes. (And for those who are NASA buffs you may be familiar with the mathematics used in the lifesaving solution for Apollo XIII, see here for the proof: http://www.datagenetics.com/blog/september22012/index.html)

So what has Apollo XIII, NASA and round pegs got to do with the Australian tax reform agenda? Putting this a different (less mathematically challenging!) way, we think that the tax reform debate very often misses the point because it asks the wrong question. No tax system will be perfect. However, we consider it possible that by first defining the basic principles on which the tax system should operate, and then stripping back the system to fit those principles, we may obtain a better overall result – a system that is more fit for purpose.

The challenge should at least be taken up. Define the principles, draft the legislation, run it over real taxpayers. If it works, set a date for its implementation at some future time that allows taxpayers to prepare. We acknowledge that will not be as easy as it sounds. The challenge we should set is to see how close to fitting the hole we can make the peg.

http://www.datagenetics.com/blog/september22012/index.html

http://www.datagenetics.com/blog/september22012/index.html

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tax survey 2013

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