Treasurer Jim Chalmers needs new approaches to pay for government services

Senior Partner Stewart Levitt Levitt Robinson Solicitors in The Australian Business Executive

Allegra Spender, the Independent Federal Member for Wentworth, has announced she is convening her own tax summit to explore new approaches to how to pay for government services and grow the economy.

Nobel laureate in Economics, Joseph Stiglitz, has written about taxing bad things and not taxing good things.

Stiglitz would not support a payroll tax which is higher, the more employees an employer hires and the higher the employer’s wages bill. Stiglitz does believe in taxing Carbon. The Stiglitz thesis depends upon what a particular government might consider bad and therefore should be taxed or alternatively, what it views as too good to tax.

Increased Tax on large Self-Managed Superannuation Fund Income (“SMSF’s”)

Taxpayers should be entitled to rely upon the law as it stands, to plan their finances. For this reason, I do not agree with Federal Treasurer, Dr Jim Chalmers, giving just over two (2) years’ notice of doubling tax rates for people drawing from superannuation nest eggs, holding in excess of three million dollars ($3,000,000.00) and without grandfathering. Their Trustees had already structured retirement investments according to the law as it stood when complying contributions were made to the SMSF’s. At least where the member beneficiaries are sixty (60) years or older and close to the age of 65 (sixty-five), when they would be able to call on their hitherto quarantined investments, at least five (5) years’ notice should be given for what effectively, retrospectively, will undermine their retirement planning, which was based on the known law at the time.

This change in government policy does not affect me, so I am writing this disinterestedly.

In a democracy, we should be able to rely upon plans made according to the law as it applies when we make our investment decisions and if the law is to change, then we should be given as much notice as reasonably practicable.

People who through enterprise, risk-taking, hard work and by deploying their professional or business skills have created wealth, should be able to retain most of it. Wealth creation is good for the economy but incentives should be provided by government for wealth to be channelled in the public interest.

Influencing private investment

While I am opposed to tax schemes aimed at creating deductions for contrived investments, it is up to the Federal Government to identify projects where private investment could replace public expenditure to produce better outcomes, for example in health, education, public housing, transport infrastructure and cutting-edge technology. This does not need to involve privatisation but rather, incentivisation, in which the tax system can play a vital role.

Government-directed investment priorities could also be better honed to our business and investment migration visa conditions where, instead of just bringing money into the country or investing in an existing or new business, the Government could schedule a range of targeted investments, prerequisite to the grant of several classes of visa.

This is particularly true during a period where, in the immediate post-Pandemic era, huge deficits have been generated through government subsidising what was a partial moratorium on economic activity. Australian governments have incurred substantial debt which inevitably carries with it repayment obligations and interest bills, which need to be serviced. Private money, wherever possible, should be attracted to replace public investment.

Obviously, government has to strike a balance between forgoing tax revenue, servicing the increased cost of debt and replacing public with private money and the Government needs to come out just ahead in that process.

“Windfall Profits” Tax

Stiglitz has also advocated a tax on “windfall profits”.

However, in considering the desirability of implementing Stiglitz’s approach, we should be careful not to deter private investment. Windfall profits, which may be, for example, derived from land rezoning, the grant of mining licences or from changes in government policy, can operate as a powerful disincentive to corrupt behaviour by public officials and lobbyists.

If land values are increased as a result of government decision, such as lifting height restrictions or increasing land site ratios, why should the beneficiary not pay a windfall tax on the resultant, increased value of the land. This is equally true if there is a change in import quotas or when other government decisions are made which produce exceptional consequential benefits for particular sectors in industry or commerce. Such taxes should not be disproportionate to the immediate benefits which they create nor operate as a deterrent to further investment or subsequent business activity, which builds upon those benefits.

Rather than focus on tax changes which militate against wealth creation, our tax system should encourage wealth generation while assisting in spreading it as far as possible, beyond the primary wealth creators.

No Tax on overtime worked for single employer

Take overtime and penalty rates, which often prove to be an insufferable burden on small business and productivity. If an employee working for a single employer, works more than thirty-five (35) hours per week, including outside of normal working hours, the employee should be absolved from paying tax on income earned for each hour worked in excess of thirty-five (35) hours in a single week, in lieu of being paid overtime or penalty rates. This reform would lighten the burden on small business operators while reducing their losses or increasing their profits, so that the tax take would be shifted from the employee to the employer. Potentially, this would produce a “win-win” for the employer, the employee and the Tax Office.

Franchisors to be responsible for franchisees’ GST and PAYG

Currently, many small business operators are laggardly in their lodgment and payment of their B.A.S. debts to the ATO. In Australia, the franchising sector reaps $180 billion in revenue each year and employs upwards of five-hundred thousand (500,000) people.

Franchisees across the board, are in widespread default of their PAYG and GST payment obligations to the tune of many billions of dollars. This is often because franchisors take the first cut, leaving the franchisee to meet all expenses of the franchised business. The sum remaining is often insufficient for them to meet their obligations to repay bank loans, cover labour costs, and retain a sustainable wage for themselves, in order to keep their own and their family’s heads above water.

The Tax Office is an unsecured creditor and is often the last to be paid. The ATO fails to recover billions of dollars a year because of small business defaults, particularly in the franchising sector. This could be cured by transferring the first responsibility to pay GST and PAYG Tax incurred in the operation of a franchised business to the franchisor, after meeting labour costs – and allowing a reasonable level of remuneration for the franchisee but before there is any distribution to the franchisor of its share of gross profit under an applicable Franchise Agreement.

This reform alone would have an enormous effect on the budget bottom line without increasing the tax burden quantitatively for anyone. It constitutes a shift in responsibility rather than an increase in the overall tax payable but would have a strongly positive impact on the Commonwealth’s tax haul.

Education – user pays

Currently, tertiary education is funded by government subsidies and HECS payments, as well as by the profits made on selling education to overseas students. Plum graduates are routinely snatched up by top-tier firms, who mostly pay nothing towards the graduates’ education but pass on to their clients the high fees for which they are able to charge-out top graduates.

Private sector industries should be annually canvassed and assessed for their periodical requirements for graduates from tertiary institutions, and businesses should be required to contribute towards the expense of educating them, in the form of offering scholarships. Alternatively a levy could be imposed on the firms which benefit from the graduates’ knowledge and skills, proportionate to their hiring requirements. Consumers of the new graduates’ services will, after a couple of years, pay a premium for accessing them but the employers generally are not required to contribute to the cost of educating them. A measure of this kind could shift some of the burden of meeting the cost of tertiary education from the public to the private sector and might relieve the HECS burden for many students.

There should be a prohibition against employers recouping the costs of such scholarships or subsidies down the track from their employees, who may be voluntarily indentured to a particular employer.

Reducing TGA’s Functions

Currently, the TGA (Therapeutic Goods Administrator) is responsible for regulating the supply, import, manufacture and advertising of therapeutic goods that can be lawfully supplied in Australia. A division of the Department of Health and Aged Care, its 2020/2021 budget was one hundred and seventy million dollars ($170,000,000.00). Although it recovers most of its overheads from government charges, it still runs at a loss and is an extra layer of bureaucracy which often serves to retard Australians’ access to the latest developments in pharmacology and medical treatment.

While the TGA should keep its oversight responsibility for regulating the export, manufacture and advertising of therapeutic goods in Australia, it should play a much diminished role in regulating the supply and import of therapeutic goods to Australia if they have an approved “CE” marking (indicating that a product has been assessed to meet EU safety, health and environmental protection requirements) or have been approved by the US Food and Drug Administration (“FDA”).

The TGA presents an obstacle to the importation and supply of CE and FDA newly approved foreign drugs and medical devices and equipment into Australia when by far the majority of innovation in therapeutic goods, occurs outside of Australia. The TGA often denies access in Australia to life-saving treatments which would otherwise have been available had the TGA not stood in the way of our being able to access the latest medical innovations from Europe and the United States while it goes through its own superfluous motions.

In Israel, for example, the approach of AMAR Medical Device Registration and Approval, is based upon having prior approval in a country whose approval process is officially recognised in Israel by law. If it is already FDA or CE approved it does not have to go through a separate testing process in Israel. In Australia, the TGA will take into account evidence and documentation supporting an FDA or CE approval but that is no guarantee of automatic and expeditious approval in Australia.

It is difficult to see how the TGA justifies setting its bar higher than the United States or Europe in determining whether to approve a new drug, treatment or device, particularly since the big Pharma companies are required by the TGA to pay for their own testing, leading to the presentation of self-serving reports in any event.

This begs the question of whether the TGA has been set-up to generate revenue for itself at the expense of giving Australians, as soon as practicable, access to therapeutic innovations from abroad.

Concessional Tax on Rental Income to Replace Negative Gearing

How to incentivise private investment in new housing stock without relying on negative gearing? In some foreign jurisdictions, this is achieved by having a low fixed rate of tax on rental income, say 10%, where negative gearing is not an option. That could work here.

Objectives of Tax System

Governments need to earn trust and to motivate, energise and streamline, rather than to deter enterprise. The aim should be to reduce costs for business while optimising the tax take from economic growth, so that we are all contributing from what we have built up together as a nation.

Stewart A Levitt is Senior Partner with Levitt Robinson Solicitors, specialising in corporate law, banking & finance, and class action law, www.levittrobinson.com.