Sustainability of tax revenue is key to any government's fiscal sustainability, that is, the ability to meet both current and future financial obligations (including debt servicing obligations) without major policy adjustment. A recent report examining broad trends within the Commonwealth tax system has identified some significant changes in tax receipts and therefore risks to the sustainability of tax revenue.
The report noted that since the early 2000s, the most significant overall changes in tax receipts as a share of GDP have been in the areas of fuel excise, customs receipts, and company tax.
While some of changes can be explained by innovation and globalisation such as a fall in fuel excise receipts being attributed to improvements in fuel efficiency of cars, and the fall in custom receipts being attributed to free trade agreements.
Other changes such as the fall in company receipts may be more concerning for the future government policy. The report indicates that the fall in company receipts is a result of investment becoming more concentrated in capital intensive industries which generally have higher losses that are carried forward. Although as the carried forward losses are used up, there could be a counteracting positive effect.
Another worrying trend in the coming decade is the increase in personal income tax receipts due to ongoing bracket creep, notwithstanding the government's recent implementation of lower personal tax rates as an attempt to prevent such an occurrence. A further challenge identified in the report is the ongoing decreases in various consumption tax receipts, in particular GST, mostly driven by consumer behaviours and technological change.
The overall effect of these trends indicates that in the future, tax receipts from consumption taxes such as the GST will continue its downward trend, while taxes on capital will either trend downwards or remain flat. Further, an increasing proportion of income will be taxed concessionally through the superannuation system due to the increase in compulsory super contributions substituting for wages growth.
Beyond these identified tax trends, the report also identifies other risks to tax receipts including:
Increasing uncertainty internationally regarding policy changes in company tax rates and tariffs which could have flow on effects for Australia;
Growth of peer-to-peer sharing economy which increases the volatility in person income tax receipts and the scope for tax minimisation.
To avoid increasing reliance on personal tax receipts in the future to achieve fiscal sustainability, whichever party is in power will have to tackle the unpopular issue of tax reform which could include broadening the GST base, wholesale changes to the rules around the sharing economy, or potential changes to how superannuation is taxed.
Want to get on the front foot and ensure that your tax affairs and structures will not be affected by potential future changes in Government policy? We can help you plan ahead and future proof you or your business's tax affairs. Contact us today.