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Longstanding tax breaks for superannuation contributions and investment properties are in the frame as the Turnbull government scrambles for alternative revenue sources to fund vote-winning income tax cuts in the next election.
Malcolm Turnbull's tax task
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Malcolm Turnbull's tax task
With the GST apparently off the table, the Prime Minister is forced to look elsewhere to deliver substantial reform, argues Mark Kenny.
And Australia's notoriously complicated system of work expense deductions could also be scrapped to be replaced with lower marginal income tax rates and an end to laborious tax return forms for countless taxpayers.
The 'plan B' switch follows Prime Minister Malcolm Turnbull's weekend announcement effectively removing the GST hike to 15 per cent from "the table" and thus leaving the government with fewer options and a significantly smaller revenue pie to distribute.
Government sources say "several" new options offer a way forward but admit the size of income tax cuts will be smaller without the expected $33 billion of annual extra revenue from a 15 per cent GST.
Work is now under way to construct a politically saleable combination of smaller changes capable of securing enough savings to return bracket creep to PAYG taxpayers, and to satisfy the government's lofty promise to deliver serious structural reform of the tax system.
Marginal seat Coalition MPs have mostly welcomed the abandonment of the GST but are now watching nervously for whatever measures are unveiled in the May budget to replace its projected revenue.
Denied the fodder for an effective scare campaign against the GST hike in the lead-up to the 2016 election, Labor nonetheless continued to probe Mr Turnbull in Parliament, calling on him to rule out the tax or accept that it remains somehow in play.
Generous superannuation concessions seem certain to get a haircut, possibly by replacing the current 15 per cent rate on contributions with whatever marginal income tax those earnings would attract, minus 15 per cent. That would go a long way to restoring some progressivity to the concession regime, which at present acts as a major incentive to wealthier income earners to park income in super accounts to avoid full income tax rates. For some low income earners the concessional rate provides no benefit or even acts as a cost penalty.
Also in the frame are earnings within super funds, at present generally taxed at 15 per cent but completely untaxed for most retirees, who also pay no tax on payouts. The proposed measure would phase in the extension of the 15 per cent tax rate to all earnings in super accounts, leaving most payouts tax-free.
The government is also likely to wind back the cap on non-concessional contributions. In a pre-budget submissions released on Monday the actuarial firm Rice Warner recommends cutting it from $180,000 per year to $500,000 over a lifetime.
Capital gains from the sale of shares and investment properties is at present taxed at only half the rate of other income. A proposal which originated in the Henry tax review would cut the discount to 40 per cent and extend it to all investment income including rents, dividends and bank interest. The broader discount would make the negative gearing of rental properties less attractive without needing to outlaw it.
On Monday treasurer Scott Morrison strongly defended negative gearing describing it as "a real opportunity for middle income earning Australians".
Another lucrative option involves scraping or severely curtailing some of the $31 billion forfeited by the budget to work expenses claimed as tax deductions. Their reduction could allow for a lower top tax bracket. Sydney Liberal Craig Laundy is leading the charge, citing the greater efficiencies of New Zealand and Britain where complex and time-consuming rules about work expenses have been ditched in favour of lower tax rates.
Mr Laundy is working with the bipartisan House Economics Committee, which will report later this month. In Britain, deductions have been simplified so that various occupations have an approved list of deductible costs, and deductions can only be claimed for expenditure that is "wholly, exclusively, and necessarily incurred". Two thirds of British taxpayers elect not to file tax returns.
The government would also pressure state governments to follow the lead of the Australian Capital Territory and swap real estate stamp duties for higher rates and land taxes. The treasury's tax discussion paper describes stamp duties as "some of the most inefficient taxes levied in Australia".
Mark Kenny, Peter Martin