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A new tax system: a fair go for Australia. Address to the First National Community Services Conference, Wesley Centre, Sydney, 14 August 1998

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The Hon Warwick Smith MP

Minister for Family Services

Federal Member for Bass


A New Tax System

A Fair Go for Australia


Address to the First National Community Services Conference

Wesley Centre Sydney

14 August 1998




Thank you ladies and gentlemen for the opportunity to address the First National Community Services Conference.


In politics there is a saying that timing is everything. One can only admire and wonder at the source of the wisdom of the organisers of today’s conference. To schedule this conference the day after the release of the biggest social and economic package seen in this nation in 60 years is to be timely indeed.


There can be little argument that our society today faces as great a challenge as at any time in those 60 years. Like perhaps never before, people are confronted by an array of pressures, deadlines, commitments, obligations and accelerating change. These strain the capacity of individuals to manage their lives let alone contribute to the social development of our community.


We are, it must be agreed, at a time in our history when decisions of national importance must be made.


Earlier this week I opened a conference that was considering the tragic issue of youth suicide. The fatal expression of discontent and despair that is youth suicide remains for our society an elusive and painful blight, that both mystifies and appals us all.


The tragic waste of a life not fully lived challenges our basic understanding of what it means to be part of a society. Can we afford both individually or collectively to accept that the community, the society, the economy we have developed is acceptable if so many of our young perceive no solutions to the rising experience of personal despair, social conflict and economic fragmentation?


This Federal Government will not accept any suggestion, as sometimes heard from our predecessors, that society today “is as good as it gets”. We are not prepared to leave the search for solutions to tomorrow’s generation. We accept the challenge to play our part in developing a society that is cohesive, energetic, compassionate and inclusive.


Yesterday the Prime Minister and Treasurer announced a package to address fundamental questions of relationship between Government and the citizens of this nation. The proposals set out yesterday involve a tax reform package and much more.


I would suggest to you that yesterday’s tax package is in fact a foundation stone from which we can all move forward with confidence into the next millennium. Just as our forebears did around 100 years ago, we are at a time in our history where our decisions will shape our nation for the next century.


In 1995 the Prime Minister committed a future Coalition Government to putting fairness and compassion back into our national social fabric. I believe that commitment has been honoured through the proposals announced yesterday.


Government can not make life easy. Political edicts cannot solve all the problems we face. What any Government must do is attempt to make life better. Government is but one player in our society. Together with the community, Government must seek to ensure that every individual has the opportunity to achieve their full potential and contribute to the wider society.


Coalition Governments have a proud tradition of building the economic fabric of our nation. Rarely however is it acknowledged that our economic reforms have been accompanied by and moulded in significant and enduring social reforms.


The Coalition comes to the debate on social policy with a record of achievement, a platform of progressive change and a commitment to strengthening the bonds of social development.


The principles that underpin our social policy approach are fundamental and sustaining.


We believe the best way to build and sustain a fairer and more compassionate society is by providing every person with the opportunity to strive for personal success, prosperity and happiness. We affirm the belief that through initiative and endeavour our society can prosper.


Our society is built upon both c ommercial enterprise and social interaction. No greater cause of social despair exists than in the inability of our commercial society to provide employment for all those seeking the expression of their potential in work. A compassionate society has a basic responsibility to assist those who are in genuine need or limited by disadvantage.


Our commitment to establishing the appropriate conditions for expansion of the commercial society to the benefit of the broader community is not at odds with any commitment to a compassionate society. Put more simply, a strong and growing economy is an es sential precondition to fashioning the potential for a fair and compassionate society.


The pursuit of higher levels of employment growth and substantially lower unemployment, remains an enduring objective of our social policy. Employment is the glue that holds together our commercial and social community. Creating the conditions that allow employment to grow remains this Government’s greatest challenge.


The Coalition Government also affirms its policy commitment to the family as the most stabilising influence on our society. Through protecting and strengthening the family, social, community and economic stability and cohesiveness is fundamentally established.


When in 1995 the Prime Minister set out the social policy priorities of a Coalition Government he indicated that sustained jobs growth and strengthening the position of families would be the twin pillars for government action.


What I would like to do now is show you how the package, announced yesterday, will help achieve these objectives. Most importantly the breadth of the initiatives the Government announced yesterday is critical to building the sort of cohesive, positive, growing community I have outlined.


There may be some in this room, who will be tempted to think that we really only need to do a few ‘little’ things to clean up our taxation and social security systems. Many may argue that incremental change is enough.


I put it to you that it has been the inability of past government to grasp the significance of incentive as a generator of economic growth that has led to our taxation system being what it is today.


The failure in our past, to openly confront the limitations of our tax system, has been a major contributing factor to the loss of social and commercial opportunity. Those who have argued against proposals that would have resulted in a more competitive, resilient and strengthened economic system have done the people of this nation a disservice.


While our democracy is continually strengthened through debate and argument, those who have used their public standing to argue against changes they privately concede are vital to our economy and our society, have placed at risk the future prosperity of our nation.


Australians now have a political choice like never before with the release of the Government’s Plan for a new tax system.


Over the next few weeks the details of the plan will be discussed and dissected in the media and, I’m sure, in forums such as this one.


We want the Australian public to be able to make an informed judgement on its worth.


We believe that the package represents a once-in-a-generation chance to address the long-term deficiencies in the present system and create the basis for economic, employment and social growth for our nation.


The present tax system, quite rightly, is perceived as unfair, inefficient and an inhibitor to growth and employment.


Reforming the system is not an end in itself. It is an essential part of the Government’s agenda to position Australia and Australians for the Twenty-First Century.


The Government’s Plan for a New Tax System is not narrowly focussed on a new tax, although some would like to portray that it is.


It is instead focussed on delivering a new tax system built on a lower tax burden and one that is fairer, more internationally competitive, more efficient and less complex.


It has at its central priorities the development of a national economic policy framework that delivers a sense of equity and fairness so fundamental to Australians.


Deficiencies in the present system


The deficiencies of the existing taxation and social security systems are legion.


The community sector is only too well aware that the highest effective marginal tax rates are not paid by the highest income earners, but by low and middle income earners in receipt of some Government assistance. A 34 per cent marginal tax rate, a 50 per cent withdrawal rate for many forms of government assistance and the Medicare Levy translates into an effective marginal tax rate of 85.5 per cent across a wide range of incomes. Indeed, over some income ranges there are plenty of illustrations where the effective marginal tax rate exceeds 85 per cent because of the layering of withdrawal rates.


It’s ridiculous that the interaction of the tax and social security systems work to destroy incentive for low and middle income earners to get a job, earn more income, or save for the future in this way.


The importance of work to the full expression of o ur human condition is demonstrated by the fact that so many low-income earners who face effective marginal tax rates of 85, 90 or even 100 per cent do work. It is obvious that the current system means that some people would be better off not looking for work or earning more income.


The National Assembly of the Uniting Church in Australia concluded in June this year that “the inequity associated with the application of high effective tax rates to low income families seriously undermines the use of progressive taxation in Australia” (National Assembly, the Uniting Church in Australia: Taxation Reform for a Fair and Equitable Society, June 1998, page 6).


The Government agrees, and the New Tax System addresses that specific problem. The current tax and social security systems are not only unfair, they are also in-human in their complexity. 12 different types of family benefits, 650 tax policy changes announced in the last 15 years, income tax legislation which has grown from 120 pages to more than 7000 as a result of 60 years of patching and filling. These are the statistics of a system in panic and confusion.


The new tax system needs to be fair, simple, consistent and clearly reward growth and employment.


No amount of tinkering at the edges will address the present and often long standing deficiencies. Australia’s tax system requires an overhaul, it needs major surgery, it needs to be changed.


In announcing the Commonwealth’s commitment to tax reform a year ago, the Prime Minister had five overriding principles that would drive reform of the tax system. Those principles are that:


* there should be no increase in the overall tax burden;


* any new taxation system should involve major reductions in personal income tax with special regard for the taxation treatm ent of families;


* consideration should be given to a broad based indirect tax to replace some or all of the existing indirect taxes;


* there should be an appropriate compensation for those deserving of special consideration; and


* reform of Commonwealt h/State financial relations must be addressed.


The Government’s Plan for a New Tax System meets all of these criteria in full. It delivers tax and social security systems which:


* reduce the total tax burden;


* are fairer;


* are more internationally competitive;


* are more efficient; and


* are simpler.


The reforms will provide community-wide benefits. They will restore the incentives to work, save and invest; restore fairness in the tax system and acknowledging the cost of raising families. They will boost our competitiveness through lower tax rates and business costs thereby creating jobs as our economy grows and incentives to employ are created. In addition they will provide a secure and stable revenue base to fund the provision of government services.


To restore the community’s faith in the personal income tax and social security systems, and therefore secure their long-term sustainability, it is necessary for the reforms to create a system in which people pay their fair share and do not have access to loopholes.


Inconsistencies and complexity in tax law provides plenty of opportunity and incentive for higher income earners to evade or avoid tax.


Those who believe this can be readily altered by minimal change deny the efforts of legislators and tax administrators over the past twenty years.


With the top marginal tax rate presently cutting in at $50,000, people earning not much more than average earnings can gain considerably by reducing their taxable income through the use of trusts and salary sacrificing.


The Government’s Plan for a New Tax System reduces both the incentive and the opportunities for tax evasion and avoidance.


Yesterday, an anti-avoidance measure was announced in relation to trusts that will require trustees of discretionary and closely held fixed trusts to identify the ultimate beneficiary of trust distributions and provide their tax file number, so providing an audit trail for the Australian Taxation Office (ATO).


This measure will not adversely affect the ordinary small business person who has a trust as a means to provide protection of assets. It is designed to address the labyrinth of trusts established to make the tracing of income nearly impossible for the ATO .


The Government’s Tax Plan will provide a new tax treatment of trusts. From the 2000-01 income year trusts will, in the main, be treated like companies. This new system will ensure that tax preferred income will be taxed fairly, while allowing trusts to still be used to hold and manage family assets.


As part of the reforms, fringe benefits will be taken into account in determining liability to tax surcharges such as the Medicare levy surcharge and the superannuation contributions surcharge. In addition, the income tests for a range of government benefits, including the Family Allowance and Youth Allowance and obligations such as Child Support will be adjusted to include the taxable value of fringe benefits.


Of course, a GST is anathema to tax cheats and tax avoiders.


Improving incentives for families to work and save


The other side of the coin to improving equity is what the Government’s Tax Plan will do to improve the incentive to work and save.


Income tax rates will be cut for about 95 per cent of all individual taxpayers.


It will mean that around 81 per cent of all taxpayers will face a marginal tax rate of no more than 30 per cent, compared with only 30 per cent of taxpayers now. All marginal tax rates will be cut except the highest.


The tax cuts and family benefit changes will more than compensate taxpayers for the introduction of the GST.


The tax and family package costing about $15 billion will see:


* an increase in the tax-free threshold from $5,400 to $6,000, with the greatest proportionate benefits to low income earners;


* a doubling of the tax-free thresholds increases provided under the Family Tax Initiative;


* a cut in the 20 per cent marginal tax rate to 17 per cent; and


* a reduction in the 34 and 43 per cent marginal tax rates to 30 per cent.


There will be additional incentives to work and save through the reduction in the family benefits withdrawal rate from 50 to 30 per cent, and an increase in the income cut out point for family payments from $24,350 to $28,200. These two measures alone will benefit 375,000 families.


The tax free threshold increase provided for families with children under the Family Tax Initiative will be doubled. The effect of this is that all single income families (including sole parents) with a child under 5 years will have an effective tax free threshold of $13,000.


For a dual-income couple earning $35,000 in combined income, with three dependent children including one aged under five years, the cuts in personal income tax and increase in family benefits is worth $77 per week. After adjusting for the GST the family will be $65 better off a week, or $3,380 a year. They are almost 10 per cent better off in net terms.


A sole parent earning $25,000 with two dependent children including one aged under five years, will have a $42 a week increase in disposable income. After the GST, this family will be almost $32 a week better off, or almost $1,660 a year (nearly 6 per cent in net terms).


Low income sole parents will benefit from the:


* 4 per cent increase in the maximum rate of pensions, well above the anticipated impact of the reform plan on the CPI;


* reduction in the pension income test withdrawal rate from 50 to 40 per cent;


* 2.5 per cent increase in the income-test-free area;


* income tax cuts which incl ude an effective doubling of the tax free threshold increases provided under the family tax initiative.


Simplifying family benefits


Building on the increased assistance to families, the Government proposes to reduce the current 12 different types of payments to 3. Importantly, the proposed new arrangements will make it easier for families to understand the assistance available to them and to access their entitlements.


The Government will consult with community organisations on the details of the new structure. It proposes to establish a new Families Office within the Australian Taxation Office to deliver the new simplified set of family assistance programs.


Security for Older Australians


The new tax system will ensure that aged and other pensioners are more than compensated for the impact of tax reform and the CPI. This involves a 4 per cent increase in the maximum rate of the pension in advance of the GST impacting on prices. This will ensure that recipients receive a real increase in their pensions up front of 1.5 per cent. There will also be a 2.5 per cent increase in the income test free area.


The Government will maintain its commitment to ensure that the single rate of pension does not fall below 25 per cent of male average weekly earnings.


On 1 July 2000 the maximum rate of pension will increase by an estimated $15.50 a fortnight for single pensioners, and $12.75 for each member of a pensioner couple.


The rate at which the pension is withdrawn as private income rises will be lowered from the present 50 per cent to 40 per cent.


The Government believes that special arrangements are needed to maintain the value of savings of senior Australians following the introduction of the GST. From 1 July 2000, each Australian resident aged 60 or more with personal income from savings and investments will be paid a one-off bonus of up to $1,000. This rebate will be phased out over the income range of $20,000 to $30,000 a year.


Self-funded retirees will be eligible for the aged-persons savings bonus and a further one-off Self-Funded Retirees Supplementary Bonus of up to $2,000.


Private Health Insurance


To improve the affordability of private health insurance, and thus increase the choice available to health consumers, and the sustainability of Australia’s valued private/public health care mix, the Government has announced a substantial initiative for private health insurance.


The Government will, from 1 January 1999, replace the current Private Health Insurance Incentive Scheme with a more generous tax rebate/benefit which will be available to all health fund members.


Members of private health funds will receive a 30 per cent benefit on the cost of their private health insurance contributions - as either a rebate on tax or a direct payment from the Government.


Under the new tax system, this new benefit is as generous or more generous than full income tax deductibility for private health insurance for more than 80 per cent of taxpayers.


Many older Australians and families will be the beneficiaries of the Government’s initiative to make private health insurance more affordable.




As you can tell from my speech so far, there is far more to this package than just the GST.


The Commonwealth is not proposing to keep the GST revenue. The Government is offering the States and Territories all of the revenue to replace the most inefficient of the State taxes and the existing Financial Assistance Grants. This will result in the permanent abolition of at least nine State taxes.


It will provide the States and Territories with access to a constitutionally secure revenue source, which will grow at the same rate as the Australian economy and at a rate significantly faster t han the revenue it replaces. It will substantially reverse the longer-term trend of the States being tied to the Commonwealth’s apron strings.


This will mean that States will have increased capacity to fund the education, health, and other social services that are critical to the Australian community.


Those who suggest that this is some sleight of hand do our nation no service at all. Given the cries from Premiers’ Conferences in the past one would have to wonder what all the fuss was about. Again we can see in these claims the cover of political Opportunism.


There will be no need for the GST rate to rise. The Commonwealth has got the Budget back in black and is not introducing a GST to improve the budget balance. The fact that the tax will be paid directly to the States and Territories will provide the resources needed to provide continued and growing public services into the next century.


Because a 10% GST is an efficient and sufficient tax that will generate increased revenue with increasing consumption over time we have made it very hard to change the rate. A decision to change will require:


* a unanimous request from the State Premiers and Territory Chief Ministers;

* an agreement by the Commonwealth Government of the day; and

  • finally legislation, would need to be passed by both Houses of the Federal Parliament.

Given the number of differen t governments and political parties that would have to agree to a future rise in the GST, we can say that a 10 per cent GST really is ‘locked in’.


The GST and the Community Sector


Virtually all of the health, education, and child care sectors will be GST free. Noncommercial activities of public benevolent institutions and a range of other charities will be GST free.


A distinguished Australian, assisted by a panel of selected community representatives, will assist the Government in consultation on outstanding GST design issues.


I am pleased to reaffirm to this gathering that religious services (such as those of the Uniting Church) will be GST-free. In addition the churches will be able to get input tax credits for GST paid on their inputs.


Donations to charities will not be subject to the GST.


Commercial activities of charities will be subject to GST to avoid unfair competition with other businesses.


Assessing the package


This is day 1 for the package. The Government knows that there is detail you will want to get on top of All households will receive details on the key elements of the package. There is a hotline that any member of the public can call and the policy document, available from Australian Government Bookshops, provides full details including many easy to consider examples.


I believe that fundamental tax reform is required to give Australia the tax system it needs to compete, to prosper and to realise its potential in the twenty-first century. This package will make Australia a fairer and more equitable society.


The package will deliver the strength of purpose and focus that our society needs right now. For too long in this country we have argued at the margins and in doing so allowed those left out in our complex world to be isolated and marginalised.


Let those who oppose in whole or in part these proposals now demonstrate the courage to set out their plan for the future. Some of those who now say major reform is needed were not long ago in a position to provide the leadership needed for change. They failed to provide leadership. They failed Australians.


Tax reform and restructuring of social security arrangements are just two elements of constructing a fairer and more compassionate society. The role the volunteer, charitable and not-for-p rofit sectors play in our society is equally vital. Providing incentives for our society to utilise the strength of the social capital within it, is also crucial.


Social capital is a living and growing phenomenon. Through the work of the community sector, the services needed by so many will continue to be delivered and expanded. The Government seeks a partnership with the sector in the interest of achieving the vital goals of social harmony and support.


In this way, I believe, we can as a community reach out to those most in need of our abilities, our capacities, our talents and our compassion.


Perhaps with the energy of a plan to reform our social framework, to rebuild our national economy, to refashion our community commitment we can present for our youth the hope and joy of a future worth living and worth living to the full.