Much debate around tax reform revolves around questions of social fairness. Take the current discussion about possible changes to the Goods and Services Tax (GST) – whether to lift its rate or broaden its base. Opponents view the GST – a flat tax on spending – as already imposing a disproportionate burden on people on lower incomes because they use a greater percentage of their income on GST-taxable spending than do the wealthy.
Proponents of a higher/broader GST argue it will increase government revenue to enable funding of important social services and redress imbalances in State-Federal funding arrangements.
While such tax reform discourse focuses on fairness, taxation reforms implemented by Australian Governments in the past thirty years suggest another story.
In 1985, Labor Treasurer Paul Keating announced the introduction of Capital Gains Tax (CGT) as part of a tax reform package. He said a primary aim of CGT was to make Australian society fairer by ensuring “taxpayers who take their income in the normal manner will not be disadvantaged as against taxpayers who choose to take their income as capital”. Contradictorily however, the tax reform package also reduced the higher marginal income tax rates, which advantaged wealthier sections of society.
In 1999, the Howard Coalition Government introduced a 50% discount on assessable capital gains. Treasurer Peter Costello indicated the measure would help “stimulate greater participation by individuals in investment”, noting that existing CGT arrangements discouraged asset realisation and capital mobility.
This orientation of CGT policy towards fostering private investment rather than serving a straightforward redistributive purpose is supported by a number of CGT provisions in the Income Tax Assessment Act 1997 (Cth) that are designed to encourage investment.
Part 3-1 Div 118 Subdivs 118-F and 118-G of the Act provide conditional exemptions from CGT in relation to various forms of capital investment. For example, venture capital limited partnerships with at least $10 million in capital can enjoy a CGT exemption if they acquire shares or options in a company worth up to $250 million. Similarly, certain foreign superannuation funds can invest in Australian companies worth up to $50 million without paying CGT.
A common requirement of these provisions is that the investments be “at risk”. Updated The Laws of Australia Subtitle 31.6 “Capital Gains” examines CGT exemptions.
Equity and economic growth are not mutually exclusive concepts, however the 30-year trend in taxation reform in Australia has been to whittle away the equitable system of progressive taxation, in which those on higher incomes pay the greater share of tax. There have been reductions in the highest marginal rate of income tax (from 60 to 45 cents in the dollar), lifting the threshold for that rate, and cuts in company tax rates (from 49 to 30 cents in the dollar). The concessions on CGT afforded to investors are of a kind with these policies.
While this long-term re-orientation of the tax system has been driven by a philosophy – of Labor and Coalition Governments – that economic growth is premised on liberating enterprise from excessive costs, it has been at the cost of billions of dollars in potential government revenue lost. An impact compounded by some very large corporations operating in Australia notoriously paying minimal or even no taxes. The broader consequences for society include cuts to social welfare and public services.
Tax policies which ensure funding for socially useful public investment, rather than the risky private kind, would help redress the social imbalance.
The author acknowledges use of Australian Tax Handbook: Tax Return Edition 2014 (Thomson Reuters (Professional) Australia Limited, 2014) for this blog.
For more information about The Laws of Australia, click here .