and tax cuts amazonaws com
SESSION 1 Tax reform and superannuation – are we there yet? Chris Richardson, Deloitte Access Economics
Australia’s future productivity challenge Contribution to annual income growth 2.5% 2.0% 1.5%
1.0% 0.5% 0.0% -0.5%
Productivity & other
Participation
Terms of trade
Total living standards
-1.0%
1980s
1990s
2000s to 2013
Decade to 2023
Has arrived sooner than Treasury expected
$55,000
$50,000
$45,000
$40,000
$35,000
$30,000 1992
1997
2002
2007
2012
And China is only part way through a tricky transition Investment spending as a share of 170 different economies 50%
China 45%
40%
35%
30%
25%
20%
15%
10%
5%
1 4 7 10 13 16 19 22 25 28 31 34 37 40 43 46 49 52 55 58 61 64 67 70 73 76 79 82 85 88 91 94 97 100 103 106 109 112 115 118 121 124 127 130 133 136 139 142 145 148 151 154 157 160 163 166
0%
Deloitte Access Economics Pty Ltd © 2016 - Federal Pre-Budget Lunch
China’s challenge means key tides changing in Oz Terms of trade index: 2013-14=100
Share of economy 8%
7%
120 Real engineering construction to GDP ratio
110 6%
The terms of trade (RH axis)
100
5%
90 4% 80 3% 70
2% 1%
60
0% 1984
50 1987
1990
1993
1996
1999
2002
2005
2008
2011
2014
2017
2020
2023
That affects Australian national income growth Annual nominal income growth (%) 12%
10% 8% 6% 4% 2% 0% -2% 1990
1994
1998
2002
2006
2010
2014
2018
If you wanted to go to Dublin … You wouldn’t start from here: • Societies aim for prosperity and fairness. • The tax system can be an important lever in both: • For most taxes, their prosperity effects are the key. • Super is unusual, in that its fairness effects are huge.
• But: • The public doesn’t understand that tax dollars are different – that some hurt the economy more than others. • And they don’t realise that the main fairness lever is actually spending, rather than tax.
• Add in a large and intractable Budget deficit and a parliament on a knife edge, and good policy may be hard to find.
Understanding the Budget: Temporary boom…… 400
$billion
350 300 250 200 150 100 50 0
Effect of the economy on the Budget
-50
-100 Budget 2000-01
Budget 2005-06
Budget 2010-11
Budget 2015-16
• For a decade the China boom produced a Budget bubble Deloitte Access Economics Pty Ltd © 2016 - Federal Pre-Budget Breakfast
8
…... and permanent promises $400
$billion
$350
$300 $250 $200
$150 $100 $50 $0 -$50
-$100 Budget 2000-01
Policy costs on expenses Budget 2004-05
Effect of the economy on the Budget
Budget 2008-09
Budget 2012-13
Budget 2016-17
• This was blown on new spending programs …. Deloitte Access Economics Pty Ltd © 2016 - Federal Pre-Budget Breakfast
9
….. and tax cuts $400
$billion
$350
$300 $250 $200
$150 $100 $50 $0 -$50
-$100 Budget 2000-01 •
Policy costs on taxes Effect of the economy on the Budget Budget 2004-05
Policy costs on expenses
Budget 2008-09
Budget 2012-13
Budget 2016-17
Now that China’s growth is slower, the task of Budget repair is harder, especially while past promises remain Deloitte Access Economics Pty Ltd © 2016 - Federal Pre-Budget Breakfast
10
If the risks come into play, so will the AAA rating We are already playing with fire. A trio of risks have put a banana skin under every single Budget since 2011 – China, the Senate and the States. If some of those risks again strip dollars out of the Budget, then the AAA rating may be on borrowed time. And remember the recent election campaign didn’t offer a choice over degrees of Budget repair. Both sides promised next to no policy action to close the gap – rather, both sides (and Treasury and its PEFO) assume: • China steadies and commodity prices fall no further.
• The Senate agrees the existing backlog and all new measures. • The States stay quiet. It is those assumptions that see Budget repair – and nothing else.
Debt low by global standards; high versus history 25%
Official Deloitte Access Economics Deloitte Access Economics & Senate blocks
20%
Only 3.5% nom & Senate blocks
15%
10%
5%
0%
-5% 1982-83
1987-88
1992-93
Deloitte Access Economics Pty Ltd © 2016 - Federal Pre-Budget Lunch
1997-98
2002-03
2007-08
2012-13
2017-18
12
A wish list for the politicians In a perfect world: • Bipartisanship returns in strength for the first time since mid-1990s. • Budget repair occurs – providing a shield against future recessions, and a true focus on fairness. • Tax reform. • Competition reform. • Cities reform. • Reform of the Federation. But a finely balanced Parliament makes those things less likely – not more likely.
Taxes drive prosperity, spending drives equality Per cent of gross income 60%
Cash Transfer benefits
50%
Taxes on consumption plus some production
40%
Taxes on individuals' income
30% 20%
10% 0% -10% -20% -30% -40% Lowest
Second
Third
Fourth
Highest Source: ABS
•
Prosperity and fairness are often key trade-offs in Budget decisions
•
Taxes are key drivers of prosperity, spending is the key driver of fairness Deloitte Access Economics Pty Ltd © 2016 - Federal Pre-Budget Lunch
14
The ‘how’ of tax reform
Deloitte Access Economics Pty Ltd © 2016 - Federal Pre-Budget Lunch
15
GST?? Hey dude, where’s my tax reform? GST reform would be a very sensible part of a wider tax reform story in Australia. And that is all the more true because of the big dollars it could have brought to bear, with the potential for those dollars to then unlock a range of other reforms.
Equally, the GST would have been good reform – not slam dunk reform – and the States wanted lots of the money, and the compensation bill was also mounting. That combination of costs left little to finance reform, and so leaves major GST reform off the agenda for now, and potentially so for some time.
The States?? Don’t just think of the Feds. The largest single tax reform open to Australia lies in the State sphere. The States have both the best and the worst taxes in Australia. Even better still, those are both State property taxes. Other things equal, that says the biggest bang for the buck in the Australian tax reform debate would lie in swapping stamp duties for land taxes … Were Australian families and businesses to face less barriers to moving to where the greatest opportunities lie, then we would have a more efficient economy, and our average incomes (wages and profits) would be higher.
Company tax cut?? Worth the wait? You bet. The same analysis that limits the bang from GST reform is rather kinder when it comes to company tax cuts. Despite the politics – which are all too easy to demonise – the economics are excellent. If you can coax more capital to invest in Australia, then it is workers who are the winners as ‘more capital’ makes workers more productive (and hence more valuable) than they are today. But you shouldn’t oversell this. The economics are excellent, but don’t forget other levers such as competition policy, ‘cities policy’ and Federal / State reforms.
Top hats versus hard hats? Or mortar boards? Annual cost of the company income tax cut $16,000
$14,000
$12,000
$10,000
$8,000
$6,000
$4,000
$2,000
$0
2016-17
2018-19
2020-21
2022-23
2024-25
2026-27
• The cost of the company income tax cut rises over time – but genuinely does deliver a benefit to ‘the size of the pie’. Deloitte Access Economics Pty Ltd © 2016 - Federal Pre-Budget Lunch
19
Houston, we have a super-sized problem … Share of super tax concessions by income decile 40% 35%
30% 25% 20% 15% 10% 5% 0% -5% First
Second
Third
Fourth
Fifth
Sixth
Seventh Eighth
Ninth
Top
More fog than clarity There’s plenty of sound and fury around proposed changes to super taxes of late. Much of that centres on cries of ‘retrospectivity’ around the $500,000 cap on after-tax contributions (which is to be backdated to 2007) – a charge that’s both true and misleading at the same time. The fog is a pity, as super taxes are in dire need of reform, and as we have a once in a decade opportunity for bipartisanship on super – with the policies of both parties close to agreement. Changes aimed at limiting tax concessions on contributions at the top end and tax-free earnings for wealthy retirees are welcome, but they aren’t as simple as they should be. There are more fairness and Budget gains to be made in super, with a more comprehensive approach the best way forward.
TEE hee There is an answer – it just isn’t one on the (parliamentary) table. Economists usually categorise tax regimes into income taxes and consumption taxes. Income taxes (such as personal income taxes and company taxes) get their cut upfront, and consumption taxes (such as the GST) get it at the back. Super is a long-lived asset – so the difference between taxing it upfront (wholly and solely on contributions) is decades distant from a scheme which takes its cut only when super is ‘paid out’. There are good reasons to make super a consumption tax – to only tax benefits. But that would cost a fortune, and also require the grand-daddy of all grandfathering. It just ain’t gonna happen. That suggests good policy reform in super would finish the long journey begun by Paul Keating, shifting super taxes solely upfront. But that’s not gonna happen either.
Tax benefit of diverting a dollar from wages to super 35% 30% 25% 20% 15% 10% 5% 0% -5%
-10% -15%
Percentage points
Super: An income tax or a consumption tax? 35%
Percentage points
30% 25% 20% 15% 10% 5% 0% -5%
-10% -15%
Current incentives to invest in super Proposed incentives to invest in super
Against that TEE benchmark – 1 … the current raft of proposals is a mixed bag. Cutting the s293 threshold from $300 to $250K and reinstating a version of the low income super contribution are ways of bending contribution taxes closer to the slope seen in the personal income tax system. That’s great, and it deserves a tick, but it is still a partial improvement, and its comes at the cost of additional complexity.
The $1.6m asset cap before an extra 15pp tax is added simply moves Australia from a TTE tax system back to a TTT tax system. So it doesn’t win too many plaudits. BUT it is essentially the same as the Labor proposal – which adds extra tax when you earn more than $75,000 from super in retirement (an effective 4.7% return on $1.6m, but one that’s subject to the volatility of markets). AND it is an indirect wealth tax, albeit an inefficiently constructed one.
Against that TEE benchmark – 2 These other measures have been accompanied by tighter caps – a new lifetime cap for after-tax contributions of $500,000 (with the infamous backdating to 2007), as well as further grinding back of annual concessional caps (to $25,000 a year regardless of age, though with five year carry over allowances to ease some of pain). Caps are God’s way of telling you the underlying policy is flawed. On balance these measures are a modest improvement. But ‘modest’ is dangerous when the Budget remains embattled and the AAA rating is in play. And possible “exceptions to the exceptions” on caps risk worsening an already complex picture (albeit not as much if the overall cap is lifted, rather than incentivising divorce). These changes still leave super as a handy wealth accumulation vehicle – which means it also leaves it open to Treasury “interest”. So, no, we aren’t there yet. These policies still look too costly to be seen as sustainable amid continuing Budget challenges.
Thank you Please complete your evaluation on the app or return t the registration desk.
Tell them Chris was really good
General information only
About Deloitte
This presentation contains general information only, and none of Deloitte Touche Tohmatsu Limited, its member firms, or their related entities (collectively the “Deloitte Network”) is, by means of this presentation, rendering professional advice or services.
Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee, and its network of member firms, each of which is a legally separate and independent entity. Please see www.deloitte.com/au/about for a detailed description of the legal structure of Deloitte Touche Tohmatsu Limited and its member firms.
Before making any decision or taking any action that may affect your finances or your business, you should consult a qualified professional adviser. No entity in the Deloitte Network shall be responsible for any loss whatsoever sustained by any person who relies on this presentation.
Deloitte provides audit, tax, consulting, and financial advisory services to public and private clients spanning multiple industries. With a globally connected network of member firms in more than 150 countries, Deloitte brings world-class capabilities and deep local expertise to help clients succeed wherever they operate. Deloitte's approximately 170,000 professionals are committed to becoming the standard of excellence.
Disclaimer: The material and opinions in this paper are those of the author and not those of The Tax Institute. The Tax Institute did not review the contents of this presentation and does not have any view as to its accuracy. The material and opinions in the paper should not be used or treated as professional advice and readers should rely on their own enquiries in making any decisions concerning their own interests.
About Deloitte Australia In Australia, the member firm is the Australian partnership of Deloitte Touche Tohmatsu. As one of Australia’s leading professional services firms. Deloitte Touche Tohmatsu and its affiliates provide audit, tax, consulting, and financial advisory services through approximately 5,400 people across the country. Focused on the creation of value and growth, and known as an employer of choice for innovative human resources programs, we are dedicated to helping our clients and our people excel. For more information, please visit our web site at www.deloitte.com.au. Liability limited by a scheme approved under Professional Standards Legislation. Member of Deloitte Touche Tohmatsu Limited © Deloitte Touche Tohmatsu
Australia’s future productivity challenge Contribution to annual income growth 2.5% 2.0% 1.5%
1.0% 0.5% 0.0% -0.5%
Productivity & other
Participation
Terms of trade
Total living standards
-1.0%
1980s
1990s
2000s to 2013
Decade to 2023
Has arrived sooner than Treasury expected
$55,000
$50,000
$45,000
$40,000
$35,000
$30,000 1992
1997
2002
2007
2012
And China is only part way through a tricky transition Investment spending as a share of 170 different economies 50%
China 45%
40%
35%
30%
25%
20%
15%
10%
5%
1 4 7 10 13 16 19 22 25 28 31 34 37 40 43 46 49 52 55 58 61 64 67 70 73 76 79 82 85 88 91 94 97 100 103 106 109 112 115 118 121 124 127 130 133 136 139 142 145 148 151 154 157 160 163 166
0%
Deloitte Access Economics Pty Ltd © 2016 - Federal Pre-Budget Lunch
China’s challenge means key tides changing in Oz Terms of trade index: 2013-14=100
Share of economy 8%
7%
120 Real engineering construction to GDP ratio
110 6%
The terms of trade (RH axis)
100
5%
90 4% 80 3% 70
2% 1%
60
0% 1984
50 1987
1990
1993
1996
1999
2002
2005
2008
2011
2014
2017
2020
2023
That affects Australian national income growth Annual nominal income growth (%) 12%
10% 8% 6% 4% 2% 0% -2% 1990
1994
1998
2002
2006
2010
2014
2018
If you wanted to go to Dublin … You wouldn’t start from here: • Societies aim for prosperity and fairness. • The tax system can be an important lever in both: • For most taxes, their prosperity effects are the key. • Super is unusual, in that its fairness effects are huge.
• But: • The public doesn’t understand that tax dollars are different – that some hurt the economy more than others. • And they don’t realise that the main fairness lever is actually spending, rather than tax.
• Add in a large and intractable Budget deficit and a parliament on a knife edge, and good policy may be hard to find.
Understanding the Budget: Temporary boom…… 400
$billion
350 300 250 200 150 100 50 0
Effect of the economy on the Budget
-50
-100 Budget 2000-01
Budget 2005-06
Budget 2010-11
Budget 2015-16
• For a decade the China boom produced a Budget bubble Deloitte Access Economics Pty Ltd © 2016 - Federal Pre-Budget Breakfast
8
…... and permanent promises $400
$billion
$350
$300 $250 $200
$150 $100 $50 $0 -$50
-$100 Budget 2000-01
Policy costs on expenses Budget 2004-05
Effect of the economy on the Budget
Budget 2008-09
Budget 2012-13
Budget 2016-17
• This was blown on new spending programs …. Deloitte Access Economics Pty Ltd © 2016 - Federal Pre-Budget Breakfast
9
….. and tax cuts $400
$billion
$350
$300 $250 $200
$150 $100 $50 $0 -$50
-$100 Budget 2000-01 •
Policy costs on taxes Effect of the economy on the Budget Budget 2004-05
Policy costs on expenses
Budget 2008-09
Budget 2012-13
Budget 2016-17
Now that China’s growth is slower, the task of Budget repair is harder, especially while past promises remain Deloitte Access Economics Pty Ltd © 2016 - Federal Pre-Budget Breakfast
10
If the risks come into play, so will the AAA rating We are already playing with fire. A trio of risks have put a banana skin under every single Budget since 2011 – China, the Senate and the States. If some of those risks again strip dollars out of the Budget, then the AAA rating may be on borrowed time. And remember the recent election campaign didn’t offer a choice over degrees of Budget repair. Both sides promised next to no policy action to close the gap – rather, both sides (and Treasury and its PEFO) assume: • China steadies and commodity prices fall no further.
• The Senate agrees the existing backlog and all new measures. • The States stay quiet. It is those assumptions that see Budget repair – and nothing else.
Debt low by global standards; high versus history 25%
Official Deloitte Access Economics Deloitte Access Economics & Senate blocks
20%
Only 3.5% nom & Senate blocks
15%
10%
5%
0%
-5% 1982-83
1987-88
1992-93
Deloitte Access Economics Pty Ltd © 2016 - Federal Pre-Budget Lunch
1997-98
2002-03
2007-08
2012-13
2017-18
12
A wish list for the politicians In a perfect world: • Bipartisanship returns in strength for the first time since mid-1990s. • Budget repair occurs – providing a shield against future recessions, and a true focus on fairness. • Tax reform. • Competition reform. • Cities reform. • Reform of the Federation. But a finely balanced Parliament makes those things less likely – not more likely.
Taxes drive prosperity, spending drives equality Per cent of gross income 60%
Cash Transfer benefits
50%
Taxes on consumption plus some production
40%
Taxes on individuals' income
30% 20%
10% 0% -10% -20% -30% -40% Lowest
Second
Third
Fourth
Highest Source: ABS
•
Prosperity and fairness are often key trade-offs in Budget decisions
•
Taxes are key drivers of prosperity, spending is the key driver of fairness Deloitte Access Economics Pty Ltd © 2016 - Federal Pre-Budget Lunch
14
The ‘how’ of tax reform
Deloitte Access Economics Pty Ltd © 2016 - Federal Pre-Budget Lunch
15
GST?? Hey dude, where’s my tax reform? GST reform would be a very sensible part of a wider tax reform story in Australia. And that is all the more true because of the big dollars it could have brought to bear, with the potential for those dollars to then unlock a range of other reforms.
Equally, the GST would have been good reform – not slam dunk reform – and the States wanted lots of the money, and the compensation bill was also mounting. That combination of costs left little to finance reform, and so leaves major GST reform off the agenda for now, and potentially so for some time.
The States?? Don’t just think of the Feds. The largest single tax reform open to Australia lies in the State sphere. The States have both the best and the worst taxes in Australia. Even better still, those are both State property taxes. Other things equal, that says the biggest bang for the buck in the Australian tax reform debate would lie in swapping stamp duties for land taxes … Were Australian families and businesses to face less barriers to moving to where the greatest opportunities lie, then we would have a more efficient economy, and our average incomes (wages and profits) would be higher.
Company tax cut?? Worth the wait? You bet. The same analysis that limits the bang from GST reform is rather kinder when it comes to company tax cuts. Despite the politics – which are all too easy to demonise – the economics are excellent. If you can coax more capital to invest in Australia, then it is workers who are the winners as ‘more capital’ makes workers more productive (and hence more valuable) than they are today. But you shouldn’t oversell this. The economics are excellent, but don’t forget other levers such as competition policy, ‘cities policy’ and Federal / State reforms.
Top hats versus hard hats? Or mortar boards? Annual cost of the company income tax cut $16,000
$14,000
$12,000
$10,000
$8,000
$6,000
$4,000
$2,000
$0
2016-17
2018-19
2020-21
2022-23
2024-25
2026-27
• The cost of the company income tax cut rises over time – but genuinely does deliver a benefit to ‘the size of the pie’. Deloitte Access Economics Pty Ltd © 2016 - Federal Pre-Budget Lunch
19
Houston, we have a super-sized problem … Share of super tax concessions by income decile 40% 35%
30% 25% 20% 15% 10% 5% 0% -5% First
Second
Third
Fourth
Fifth
Sixth
Seventh Eighth
Ninth
Top
More fog than clarity There’s plenty of sound and fury around proposed changes to super taxes of late. Much of that centres on cries of ‘retrospectivity’ around the $500,000 cap on after-tax contributions (which is to be backdated to 2007) – a charge that’s both true and misleading at the same time. The fog is a pity, as super taxes are in dire need of reform, and as we have a once in a decade opportunity for bipartisanship on super – with the policies of both parties close to agreement. Changes aimed at limiting tax concessions on contributions at the top end and tax-free earnings for wealthy retirees are welcome, but they aren’t as simple as they should be. There are more fairness and Budget gains to be made in super, with a more comprehensive approach the best way forward.
TEE hee There is an answer – it just isn’t one on the (parliamentary) table. Economists usually categorise tax regimes into income taxes and consumption taxes. Income taxes (such as personal income taxes and company taxes) get their cut upfront, and consumption taxes (such as the GST) get it at the back. Super is a long-lived asset – so the difference between taxing it upfront (wholly and solely on contributions) is decades distant from a scheme which takes its cut only when super is ‘paid out’. There are good reasons to make super a consumption tax – to only tax benefits. But that would cost a fortune, and also require the grand-daddy of all grandfathering. It just ain’t gonna happen. That suggests good policy reform in super would finish the long journey begun by Paul Keating, shifting super taxes solely upfront. But that’s not gonna happen either.
Tax benefit of diverting a dollar from wages to super 35% 30% 25% 20% 15% 10% 5% 0% -5%
-10% -15%
Percentage points
Super: An income tax or a consumption tax? 35%
Percentage points
30% 25% 20% 15% 10% 5% 0% -5%
-10% -15%
Current incentives to invest in super Proposed incentives to invest in super
Against that TEE benchmark – 1 … the current raft of proposals is a mixed bag. Cutting the s293 threshold from $300 to $250K and reinstating a version of the low income super contribution are ways of bending contribution taxes closer to the slope seen in the personal income tax system. That’s great, and it deserves a tick, but it is still a partial improvement, and its comes at the cost of additional complexity.
The $1.6m asset cap before an extra 15pp tax is added simply moves Australia from a TTE tax system back to a TTT tax system. So it doesn’t win too many plaudits. BUT it is essentially the same as the Labor proposal – which adds extra tax when you earn more than $75,000 from super in retirement (an effective 4.7% return on $1.6m, but one that’s subject to the volatility of markets). AND it is an indirect wealth tax, albeit an inefficiently constructed one.
Against that TEE benchmark – 2 These other measures have been accompanied by tighter caps – a new lifetime cap for after-tax contributions of $500,000 (with the infamous backdating to 2007), as well as further grinding back of annual concessional caps (to $25,000 a year regardless of age, though with five year carry over allowances to ease some of pain). Caps are God’s way of telling you the underlying policy is flawed. On balance these measures are a modest improvement. But ‘modest’ is dangerous when the Budget remains embattled and the AAA rating is in play. And possible “exceptions to the exceptions” on caps risk worsening an already complex picture (albeit not as much if the overall cap is lifted, rather than incentivising divorce). These changes still leave super as a handy wealth accumulation vehicle – which means it also leaves it open to Treasury “interest”. So, no, we aren’t there yet. These policies still look too costly to be seen as sustainable amid continuing Budget challenges.
Thank you Please complete your evaluation on the app or return t the registration desk.
Tell them Chris was really good
General information only
About Deloitte
This presentation contains general information only, and none of Deloitte Touche Tohmatsu Limited, its member firms, or their related entities (collectively the “Deloitte Network”) is, by means of this presentation, rendering professional advice or services.
Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee, and its network of member firms, each of which is a legally separate and independent entity. Please see www.deloitte.com/au/about for a detailed description of the legal structure of Deloitte Touche Tohmatsu Limited and its member firms.
Before making any decision or taking any action that may affect your finances or your business, you should consult a qualified professional adviser. No entity in the Deloitte Network shall be responsible for any loss whatsoever sustained by any person who relies on this presentation.
Deloitte provides audit, tax, consulting, and financial advisory services to public and private clients spanning multiple industries. With a globally connected network of member firms in more than 150 countries, Deloitte brings world-class capabilities and deep local expertise to help clients succeed wherever they operate. Deloitte's approximately 170,000 professionals are committed to becoming the standard of excellence.
Disclaimer: The material and opinions in this paper are those of the author and not those of The Tax Institute. The Tax Institute did not review the contents of this presentation and does not have any view as to its accuracy. The material and opinions in the paper should not be used or treated as professional advice and readers should rely on their own enquiries in making any decisions concerning their own interests.
About Deloitte Australia In Australia, the member firm is the Australian partnership of Deloitte Touche Tohmatsu. As one of Australia’s leading professional services firms. Deloitte Touche Tohmatsu and its affiliates provide audit, tax, consulting, and financial advisory services through approximately 5,400 people across the country. Focused on the creation of value and growth, and known as an employer of choice for innovative human resources programs, we are dedicated to helping our clients and our people excel. For more information, please visit our web site at www.deloitte.com.au. Liability limited by a scheme approved under Professional Standards Legislation. Member of Deloitte Touche Tohmatsu Limited © Deloitte Touche Tohmatsu
