Revenue raising options will have to be reviewed before long

Treasury Secretary Martin Parkinson's call for a broadening of the Good and Services Tax (GST) base as a source of future revenue reveals just how inadequate the recent Henry tax review was in addressing future government funding. The terms of reference of that review ruled out the consideration of important elements in the system, including the GST.

Our ageing population has caused a reduction in the percentage of working-age population and an increasing percentage of people living off their past savings and government welfare payments. Also, lower income and capital gains tax collections because of losses suffered in the global financial crisis and the advent of lower interest rates haven't helped maintain the previous level of growth in personal income tax collections.

There's another reason the growth in personal income tax collections has slowed despite modest increases in marginal income tax rates in the lower and middle income ranges. This is the almost three-fold increase of the tax-free area before personal income tax is payable.

Compared with previous income tax regimes, the tax-free areas or thresholds are the highest they have ever been. Forty years ago, people started paying tax at an annual income just above $1000.Today, no income tax is payable until annual income reaches $20,542 and a couple with income equally split between them pay no tax until their combined annual income exceeds $41,084.

The situation is even more favourable for couples aged over 65, a growing percentage of the population where a combined annual income (again equally split) is not taxed until it exceeds $57,950. This means that in practice the tax-free area exceeds the new higher maximum age pension for a married couple of about $30,000 annually.Younger working-age families are the meat in this tax-paying sandwich. They will inevitably face higher income tax through bracket creep (not indexing tax thresholds) or discretionary rate increases.

The harsh reality for personal income taxpayers made clear by Treasury 40 years ago in submissions prepared for the Asprey tax review is that the higher the tax-free areas are set, the higher the marginal tax rates have to be to raise needed revenue. Unless the federal government reverses past decisions to increase tax-free areas, the GST is the obvious source of additional revenue as the ageing population spends its past savings.

Income tax collections are struggling to fund existing commitments and these commitments, without major adjustments, are set to grow, particularly in health and age pension outlays. For this and other reasons, there's likely to be another major review of revenue-raising options, even if next month's budget focuses, as widely expected, on cutting expenditure commitments.

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Daryl Dixon

Executive Chairman

Daryl Dixon is one of Australia’s foremost investment experts and a well known writer and consultant. He has provided trusted advice to thousands of personal clients over more than 25 years and is an acknowledged expert in the areas of tax, superannuation (including public sector superannuation), social security and investments.

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