Taxation in Australia (2014)

 

Recent articles on tax in Australia focus on corporate tax minimisation by large companies. There is a wide array of opinions on this, ranging from it being “morally wrong” (Aston, 2014b) to there being a strong case for reducing corporate tax (Creighton, 2014).

Companies that operate in Australia undoubtedly benefit from their Australian customers and the strong Australian legal system, which allows them to trade with confidence that contracts will be fulfilled and so forth. It is understandable that many Australians have reacted negatively to large and wealthy companies finding ways of paying very little tax to their government.

This is perhaps slightly hypocritical, as it can be reasonably expected that most ordinary citizens would wish to minimise their own tax and find legal ways of doing so. In which case, why should a business (which exists to increase profits and reduce costs) pay more tax than it needs to? In the cases of companies legally going offshore and finding a country with lower taxes, is this not merely a case of market forces?

If the average Australian found a new supermarket selling all the items they usually buy but at lower prices, in most cases they would shop at the new supermarket. Such behaviour is supposed to be well-regarded in a capitalist society, but a company going to a cheaper country is regarded as wrong. Does the popular expectation of corporate responsibility extend to expecting greater morality of multibillion-dollar corporations than we expect of each other as citizens?

The Abbot government was recently warned that the Australian Taxation Office (ATO) is ill-equipped to catch tax avoiders (Aston, 2014a). One of the major functions of government is to enforce its laws. If a government is failing to do so, it is arguably failing all of its citizens who rely upon it to do so. In this instance, ordinary taxpayers will feel especially aggrieved as they dutifully follow the rules and pay a few thousand per year for most of their lives while stories of missing billions appear in the press.

If illegal corporate tax evasion is allowed to continue, this could lead to a loss of faith in the taxation and legal system as a whole. Individuals cannot usually succeed in illegal tax avoidance. If the general population believes that rich companies are allowed to do as they please while they are forced by law to follow the rules, they will understandably perceive the system as unfair. It would be difficult to convince anyone to pay their taxes if they do not feel the system is equitable.

A further complication is that corporations may have to raise prices and lower wages if their profit margin is reduced by paying more taxes. This could result in a diminished standard of living for Australians. The positive effects of greater tax income for the government could be partially negated by this, but the precise net effect would be incalculable and it is unimaginable that a government would overtly allow illegal tax evasion for this reason.

The leader of the Australian Labor Party, Bill Shorten recently drew attention to mining taxes, “using the failed examples of its predecessors as a lesson in what not to do” (Latimer, 2014). He called for a dispassionate discussion with business input and said that “his party would undertake serious consultation with the industry rather than hijack it” (Latimer, 2014), saying “There are lessons out of the mining tax – before you do anything, work with the states and work with industry – no surprises”. Mining forms a large part of the Australian economy (Australian Bureau of Statistics, 2013), so Shorten’s cautious stance about future changes to the tax regime are understandable.

Australians pay at least 125 taxes each year, of which 99 are levied by the national government, 25 by states and one by local government (council rates) (Treasury, n.d.). A report in 2008 called Australia’s tax system the “third most complex in the world” (Corderoy, 2008).

Sharon Grierson, Chair of the Federal Public Accounts and Audit Committee said in Parliament that “the level of service that the Tax Office gives to tax payers is constrained by the complexity of the tax laws” (Corderoy, 2008). The committee found that although the ATO is a world leader in tax administration, Parliament and Federal Government need to spend more time developing coherent and simple tax policies and legislation (Corderoy, 2008).

It could be said that the complexity of the Australian tax system is partly responsible for the ease in which corporations evade tax. With a system so complex, it must be difficult for legislators to identify flaws until it is too late and they have already been taken advantage of by corporations.

Treasurer Joe Hockey has suggested that Australia needs a more effective way of testing welfare to ensure that only those in need of it receive it (Jericho, 2014). The Organisation for Economic Co-operation and Development (OECD) noted that “Australia has one of the most progressive income taxation systems globally” (Jericho, 2014). The OECD also noted that as an Australian’s income increases, there is a sharp withdrawal of benefits and that such systems are designed in order to prevent disincentive to work (Jericho, 2014).

Greg Jericho (2014) argues that as the Australian welfare system is one of the best-targeted in the world, the government “should be less concerned about whether the right people are getting welfare, and more concerned about whether the right people are getting enough”.

Australia’s many taxes support many benefits and all Australians benefit from the wealth of their government. However, the recent poor performance of the ATO could reduce trust in the system and perhaps even reduce citizens’ willingness to pay their taxes. As has been shown recently, corporations have already succeeded in not paying their taxes, in most cases without breaking the law. Their ability to do this has been questioned by everyone from ordinary customers to senior politicians, so some attempt at a change in corporate tax legislation is to be expected.

The recent complaints about the low tax bills of major corporations and “welfare queens” shows that Australians pay taxes under the assumption that the system is largely equitable and that everyone pays their share and is allowed to take only what they need. When this assumption is called into question, there is anger from all quarters. This shows that an important part of governing and taxing Australians is the ability to at least appear fair and just.

 

References:

Aston, H., 2014a. Government warned that ATO not up to catching tax avoiders. [online] Available at: <http://www.smh.com.au/federal-politics/political-news/government-warned- that-ato-not-up-to-catching-tax-avoiders-20140930-10oa22.html> [Accessed 19 October 2014].

Aston, H., 2014b. Gerry Harvey brands tax avoidance ‘morally wrong’. [online] Available at: <http://www.smh.com.au/business/gerry-harvey-brands-tax-avoidance-morally- wrong-20141001-10oph3.html> [Accessed 19 October 2014].

Australian Bureau of Statistics, 2013. Mining Industry: Economic Contribution. [online] Available at: <http://www.abs.gov.au/ausstats/abs@.nsf/Lookup/by%20Subject/ 1301.0~2012~Main%20Features~Mining%20Industry~150> [Accessed 21 October 2014].

Corderoy, A., 2008. Australia’s tax system ‘third most complex in the world’. [online] Available at: <http://www.moneymanagement.com.au/news/taxation/archive/australia-s- tax-system-third-most-complex-in-the-w> [Accessed 12 October 2014].

Creighton, A., 2014. There’s a strong case for cutting company tax. [online] Available at: <http://www.theaustralian.com.au/business/opinion/theres-a-strong-case-for-cutting- company-tax/story-fnc2jivw-1227086907681> [Accessed 14 October 2014].

Jericho, G., 2014. Australia’s already progressive tax system doesn’t need further tightening. [online] Available at: <http://www.theguardian.com/business/grogonomics/2014/ apr/29/australias-already-progressive-tax-system-doesnt-need-further-tightening> [Accessed 23 October 2014].

Latimer, C., 2014. Labor looks to revive mining tax. [online] Available at: <http:// www.miningaustralia.com.au/news/labor-looks-to-revive-mining-tax> [Accessed 21 October 2014].

Treasury, n.d. Architecture of Australia’s Tax and Transfer System. [online] Available at: <http://www.taxreview.treasury.gov.au/content/Paper.aspx?doc=html/publications/papers/ report/section_2-03.htm> [Accessed 17 October 2014].