Friday 30 April 2010

Henry Tax Review and Reform of the Australian Tax System

The long-awaited Henry Tax Review Report will be made public on Sunday. The government has been sitting on the report for a long while, and the release is just in time to feed into this year's pre-election budget. The government has already hinted that this year's budget will cut tax for "most" middle-income "working families", so I'm guessing all the revenue raising possibilities contained within the Henry Report will have been thoroughly examined. It will be interesting to see what the report contains, and which bit the Labor government chooses to adopt -- especially in the near term (I expect any costly or difficult reform will be "phased in" over enough time to leave it as a problem for Mr Rudd's successor). My guesses as to what end up as policy based on the report:
* resource tax - this seems a no-brainer given the high profit margins currently enjoyed by the big miners due to the resource boom
* superannuation changes - I will be pleasantly surprised if Labor doesn't fiddle with the superannuation laws. The most obvious way to get some more revenue from the "rich" will be to eliminate the recently introduced tax-free status for superannuation income during the pension phase. Self-funded retirees are too "rich" for most of them to be Labor voters, so Mr Rudd will be happy to tax them more. The revenue will probably be used to increase the tax benefits of superannuation for low-income workers. Apparently a flat 15% tax on super contributions isn't "fair" as high-income workers get a bigger "benefit" -- conveniently forgetting that the bigger benefit is due to paying a much higher rate of tax in the first place.
* capital gains - I suspect the 50% tax rate "discount" applied to long-term capital gains will be removed or reduced. And I doubt the cost-base indexation it replaced won't be brought back in, unless it is also introduced for savings account interest (ie. only savings account interest above the CPI is taxed). That would fit in with the rumours about making savings for low-income workers more attractive.
* negative gearing - I doubt this will be axed (it had too much impact on housing investment last time changes were attempted under Keating), but it may be "quarantined" ie. Interest costs are only deductible against income (rent) from the same investment type. They already have similar rules relating to different types of capital gains.

I'm sure there will be lots of surprises in the Henry report and the May budget. But I'm not expecting them to be pleasant ones for this middle-income "working family" -- "tax effective" investments are likely to come under serious attack.

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Anonymous said...

Questions has to be asked:

Have senior members of the Labor Party their Clique family members and hangers on been "INSIDER TRADING" on their PRIOR Knowledge of the Henry Tax review?....

Is anybody even checking?

Why was it kept "TOP SECRET" for so Long Months and Months and Months?...

Something Stinks!.....

mOOm said...

They won't touch the tax free pension phase super payouts as that was expressly forbidden from investigation by the Henry Review. I do expect that we'll move one step closer to the Roth IRA model where super contributions are fully taxed but earnings are not. The Henry review will if anything reduce overall taxation on capital from all the sounds it has been making. First they may reduce the corporation tax in return for the resource rent tax. They might fiddle with CGT discounts but doubt they will eliminate them. The aim overall to lessen the gap in tax treatment between different forms of savings and to increase the tax burden on immobile land and reduce it on more mobile capital.

mOOm said...

They haven't released it till now for a few reasons. Obviously there's stuff in there the government doesn't like and so it has needed time to draft its reaction which will be released with it. And second it's not much of a secret about what's in there so they've been using the time to get reactions so they can decide what to pick and what not to pick from it. But still, it has been a long time.