Pre-budget special: IPA’s Tony Greco on tax reform

The need for tax reform in Australia has never been greater, says Tony Greco, General Manager Technical Policy at the Institute of Public Accountants. 

Until that reform is in place, Australia is “living on borrowed time”, he says.

The IPA’s Pre-budget Submission 2024-25 advocates strongly for reforms that support small businesses, and encourage a fairer and more equitable tax environment.

All that’s required now, Greco says, is the political will to ensure the community is engaged and informed around the societal and economic benefits of a simpler and more resilient tax system.

Q How fair and simple is Australia’s current tax system? 

A There are three general principles: fairness, equity and simplicity. I think everyone is in agreement that we’ve moved away from all three. Our tax system is far from simple. It’s putting an unfair load on workers and it’s on a narrow basis.

So it is failing on all three core principles that we discuss in our pre-budget submission.

We all understand the need to make it fit for purpose. Unfortunately, that task is becoming more and more difficult with all the ‘band-aid’ measures introduced over the years.

The OECD has been warning Australia for more than 10 years; as our debt accumulates, it makes the task even more difficult. We can’t ignore the obvious, which is the fact that structural deficits add to the existing debt. At some stage, structural change absolutely has to happen. We can’t keep kicking this can down the road.

We have former Treasury officials such as Ken Henry reminding us of the intergenerational theft that occurs if we do nothing. The younger population will carry a great burden if nothing else changes, and that’s another fairness issue.

Q The IPA believes GST reform is necessary. What changes are we specifically talking about?

A When you look at Australia versus other countries, the base that GST is applied to is a lot lower in Australia. Less than 50% of consumption in Australia attracts GST, so it doesn’t stack up. Because of all of the exemptions, it’s not the growth tax that it was envisaged to be. That's number one. 

Secondly, the threshold 10% rate is well below the international average. So, in terms of GST reform we’re referring to both the base and the rate. GST will need to be part of holistic reform along with many other measures to broaden the tax base.

Q The IPA’s submission says there is an over-reliance on personal tax receipts that places too high a burden on individuals. How should the system change?

A When you look at how much of the tax pie is coming from workers, you’re basically taxing personal effort much more than other sources of tax income, like capital gains. If you’re trying to incentivise the population to work hard while you’re imposing high levels of  personal tax, that is going to hold the economy back. 

It also encourages people with valuable skills to move to other countries that are more attractive in terms of personal tax. So, for many reasons it’s just not a good thing to have a high rate of tax applied to workers.

It is becoming more and more obvious that this is not good, particularly with an ageing population where fewer workers will be footing the bill to cover the growing number of retirees.

Q What non-tax measures and supports should be changed to aid small businesses?

A We have listed quite a few in our pre-budget submission. 

For businesses at the smaller end of the scale, the R&D concessions are a challenge. Of course, for Australia to advance we need innovation. The R&D incentives are for a specific cohort of taxpayers who engage in innovation.

But then you’ve also got all the small, local businesses providing products or services. They are finding it pretty tough at the moment, in terms of rising cost and the inability to recoup through price increases. Many businesses are price takers, and their margins and profitability are being smashed. 

We’re looking, in this coming budget, for some basic measures to help these small businesses that are suffering. They’re waiting for better times, but in the interim they’re suffering. 

The Australian Small Business and Family Enterprise Ombudsman Bruce Billson said earlier this month that 43% of small businesses were not profitable in the 2022–23 financial year. 

That’s a warning sign to the government that this major cohort of employers – employing 42% of Australian workers –  is also suffering the same cost pressures as individuals.

Q How should the government reform payroll tax and other state taxes? 

A We have this big problem in that the states are reliant on stamp duty, land tax and payroll tax to generate tax revenue.

Payroll tax is basically a disincentive to employ someone once you've reached a certain threshold. So, it doesn’t really make sense, but unfortunately the states need that revenue.

GST was always intended to get rid of some of these inefficient taxes but because the GST base is so low, it couldn’t do that. 

So, we're in a catch-22. We can’t get rid of inefficient taxes unless we broaden the tax base. The states can’t just remove inefficient taxes like stamp duty and payroll tax, and move to land taxes, which many believe is a better long-term solution.

It comes back to the Commonwealth. How can we fill the gaps? This is where holistic rejigging of the tax system becomes vital. Right now, the tax system is not fit for purpose.

But it’s a massive challenge. If you said the GST rate was going to rise in the middle of a cost-of-living crisis, there would be outrage. It would be political suicide in the current environment.

Q Why does the IPA support the establishment of a Commonwealth tax advisory board?

A The Henry review recommended it and a government committee also recommended it.

It’s a long-outstanding recommendation and it seems odd that an agency the size of the ATO, which impacts on everyone, doesn’t have a body that ensures it does what it says it should do, which is to treat taxpayers fairly. 

The ATO has a charter and it needs to live up to that charter. It needs an oversight board that makes sure community expectations are met. I think from that perspective, it’s quite odd that this is still outstanding.

Q How will you advocate for key initiatives?

A On the advocacy front we’ve had a lot of wins at the micro level and at the macro level. 

The lack of progress on tax reform is a political inertia. You need political courage to bring the community along the road to understanding why the system is broken. You need to get it to the level where people understand that we can’t borrow money indefinitely to fund services the community expects the government to provide.

I don’t think the public understands the gravity. Nobody has explained it to them. So the political challenge is how you get the buy-in from the public, because not everyone will be a winner from tax reform.

But, ultimately, that’s what politicians are paid to do.