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Australia's tax system suffers from loopholes you could drive a company car through … onto a leveraged investment property, writes Josh Gordon. MORE than $30 billion a year is being leached out of the revenue system by a tangle of Federal Government tax loopholes, exemptions and concessions. So-called "tax expenditures" — the revenue lost through deductions and concessions allowed by the tax system — are soaring. Federal Treasury estimates they cost the budget $31.2 billion in 2003-04, 9.1 per cent more than in 1999-2000 and equivalent to 22 per cent of the total amount of tax collected from individuals, companies and superannuation funds. By 2007-08, tax expenditures are expected to hit $38.7 billion, an increase of 24 per cent. The figures lend weight to claims by prominent Liberal backbencher Malcolm Turnbull and others that tax cuts are affordable, provided that the Government is prepared to wear the political pain associated with abolishing at least some of the concessions on offer. In a scathing assessment, ANZ chief economist Saul Eslake said the exemptions had distorted the economy, encouraged tax avoidance and helped explain why the Tax Act ran to more than 9000 pages. "It is indisputable that these exemptions, concessions and deductions lead to substantial losses of revenue, cause significant distortions in the economy, favour high-income taxpayers at the expense of lower-income taxpayers … and create opportunities of evasion or avoidance of tax," Mr Eslake said. Advertisement AdvertisementOne of the most distorting tax concessions is the way Australia's tax system treats investment housing, although removing it now could lead to a disastrous collapse in house prices. Negative-gearing rules allow investors to write off the cost of borrowing used to acquire an asset against all income, not just the income generated by the asset. At the same time, capital gains earned on assets held for more than 12 months are taxed at half the rate of other income. That means a taxpayer in the highest tax bracket can immediately write off interest costs for an investment property at the rate of 48.5¢ in the dollar (the top tax rate including the medicare levy). Yet the capital gains are taxed at just 24.25¢ in the dollar when the asset is sold. "To the best of my knowledge, no other country in the world is so generous to leveraged investments as Australia," Mr Eslake said. He said it was "absolutely no coincidence" that established house prices had grown by an average of more than 70 per cent during the four years after the capital gains tax concession was introduced in 2000. Last year, spending on investment housing exceeded productive investment in factories and machinery for the first time. "Since that part of Australia's gross domestic investment which is not financed by domestic saving must be financed by adding to our foreign liabilities, it ought to be of some concern that the tax system provides such powerful incentives to invest in assets whose capacity to contribute to the servicing and ultimate repayment of those foreign liabilities is, for all practical purposes, zero," Mr Eslake said. The Treasury figures show that the value of revenue foregone because of the capital gains tax has risen sharply. In 2003-04 it wiped about $2.6 billion from the revenue base. And Tax Office figures show that last year 1.4 million taxpayers declared total rental income of $15.2 billion, yet claimed rental deductions of $17.8 billion. Declared rental income grew 12 per cent during the year, while rental deductions claimed leapt by almost 20 per cent. At the same time, about 930,000 individual taxpayers declared $9.5 billion in net capital gains in their 2003-04 tax returns — 53 per cent more than the previous year. The Tax Office is now throwing unprecedented resources at tackling bogus claims. Its 2005-06 compliance report released last month shows that more than half a million taxpayers will be targeted because of concerns about their work deductions, rental deductions or declared income. The concessional treatment of employer-provided cars is another area of concern. The Treasury figures show that fringe benefit tax breaks for people taking part of their pay in the form a company car costs about $1.1 billion a year in lost revenue. Another major tax expense are tax breaks for people aged over 65, costing about $1.7 billion a year in foregone revenue. Under this exemption, couples aged over 65 will be able to earn up to $43,956 a year from investments before having to pay any income tax. Deductions for work-related expenses are also soaring. The Tax Office figures show expense claims for cars, travel, uniforms, laundry and self-education amounted to $10.7 billion last year, 9 per cent more than the previous year. Melbourne University professor John Freebairn argues that the tax system is crowded with a range of distorting taxes and rebates that could be abolished to make the tax system fairer for everyone. Professor Freebairn says $2.5 billion a year could be saved by scrapping the capital gains tax discount. A further $5 billion a year could be raised by removing some work-related expenses, include $3.7 billion in work-related car expenses, $750 million in other travel expenses, and clothing and uniform expenses worth $1.1 billion. Labor is sympathetic, although it has failed to say which concessions should be abandoned. The Government, however, has signalled a deep reluctance to act. Senator Nick Minchin last week said advocates of a broader tax base and lower rates needed to take "a political reality check". "While I'm sure people would welcome a tax cut, the political screams that would be heard from those who were denied deductions and concessions they currently have would be potentially overwhelming, and people ought to take a political reality check when advocating such endeavours, as admirable as they may be," he told The Age. Treasurer Peter Costello has also attacked such proposals. "When you hear people talk about broadening the base, what they're actually talking about is increasing taxes in some areas," he told the ABC's 7.30 Report. "The immediate question you ask somebody who wants to broaden the base is, who's going to pay more under that proposal?" [ Last edited by horseanddragon on 2005-9-16 at 05:03 PM ] |
