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Three-tiered model best for personal tax says CPA Australia.

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17 March 2004

Three-tiered model best for personal tax says CPA Australia

Australia's leading professional finance and accounting body, CPA Australia, today released a discussion paper which proposes a series of reforms for Australia's personal tax system, including a three-tiered model, the abolition of the tax free threshold, a redesigned low income rebate, and a reduction in higher income family welfare.

CPA Australia's CEO, Greg Larsen said the proposed model will improve efficiency, equity and simplicity of the system on a revenue neutral basis, involving the full return of bracket creep to taxpayers in the year of implementation.

'The payoff for implementing this type of model includes a positive ongoing contribution to GDP, increased community saving and investment, a reduction in tax avoidance and evasion, and reduced tax administration and compliance costs,' Mr Larsen said.

The discussion paper, Reforming Australia's personal tax system - a model for the future, considered 18 alternative personal tax scale models. The recommended model, if implemented, would replace the current five-tiered scale including the tax-free threshold with the following three-tiered model:

Current System Proposed model

Taxable income Tax rate Taxable income Tax rate

$0 - $6000 Nil $0 - $24 000 16c

$6001 - $21 600 17c $24 001 - $50 000 29c

$21 601 - $52 000 30c Over $50 000 42c

$52 001 - $62 500 42c

Over $62 500 47c

With the tax-free threshold abolished, compensation for lower income earners would come from an increase in the low-income rebate set at $800 instead of the current $235, reducing by 4 per cent for incomes above $24 000 annually, a reduction in the lower tax rates and a change in the income levels at which the new tax rates apply.

This change should be associated with a significant reduction of upper-income welfare, which will increase the equity and efficiency of the overall tax and social security system.

The discussion paper argues that the effective marginal tax rate (EMTR) problem cannot be eliminated by changing tax rates alone, and that better targeted welfare would ameliorate much of the problem. CPA Australia, however, emphasises that modelling in this area to date has been largely inconclusive, and a more comprehensive review is required.

Introduction of a three-tiered model such as that proposed in the discussion paper is achievable in the short term in a revenue neutral manner funded by tax from growth in incomes and bracket

creep. The efficiency dividend of a properly redesigned tax system will also provide a sound basis for revenue into the future.

Other reform initiatives proposed by the discussion paper would wind back the compliance costs for both individuals and the government agencies that administer tax laws in respect of individual tax return obligations. These include:

• introducing an income statement option for taxpayers with very straightforward affairs; • introducing withholding taxes on dividend and interest; • replacing the current work related expense provisions with a $300 tax rebate; and • introducing a tax-free de-minimus amount for small capital gains of $5000.

Mr Larsen emphasised that while much tax reform has occurred in the last few years, the current personal tax and welfare system has major defects that must be addressed if Australia is to have a more effective personal taxes system for the 21st century.

'The rate at which our highest marginal rate kicks in is low by international standards. Too many low / middle income families pay excessive high effective marginal tax rates. And the individual compliance associated with our income tax laws is also an ongoing problem that requires urgent review,' Mr Larsen said.

Mr Larsen said the paper has been developed to contribute to the ongoing debate, work and consultation on developing a better personal tax system.

'In what is an election year, with both the government and opposition expected to make taxation policy announcements, our paper puts forward practical examples of how reform of the current rate scales applying to individuals could be achieved,' Mr Larsen said.

'We need a personal tax system that delivers the revenue to fund essential services such as health, education, welfare and national security, while minimising the impact on economic growth.

'CPA Australia's policy for many years has been that Australia needs a tax system based on the 30/30/10 principle, where the first two thirties are the top personal tax rate and the company rate, and the 10 per cent rate is the GST.

'CPA Australia believes the model proposed is the type of option that should be seriously considered to reform the personal tax system and help us gradually achieve the 30/30/10 objective.

'We wish to acknowledge the work by Professor Brian Andrew CPA, University of Canberra in the modelling and analysis undertaken in the production of this discussion paper.'

Further information

• CPA Australia's discussion paper (Acrobat 410k)

Media enquiries

Paul Drum, Senior Tax Counsel, Mob: 0414 760 385 and Petros Kosmopoulos, Communications Manager, Tel: (03) 9606 9873 Mob: 0414 702 608